Examination of Witnesses (Questio Numbers
100-119)
DEPARTMENT FOR
TRANSPORT AND
LONDON UNDERGROUND
PPP ARBITER
19 OCTOBER 2009
Q100 Mr Davidson: It comes back to
the point some of my colleagues have made. You did not see those
contracts then, is that right?
Mr Devereux: No, we did not see
the contracts being made below Metronet; correct.
Q101 Mr Davidson: So you were not
aware that it was a weak-centre, strong-barons model?
Mr Devereux: Our assumption was
that this company had given us a plausible exposition of how it
was going to deliver this through its tied sub-contractors and
I think it must be the case, but I will check, that we were assuming,
that being the case, they would put in place appropriate contracts.
That is exactly what happened.
Q102 Mr Davidson: Sorry. Let me just
be clear. It was your assumption. Many of these people, it can
be assumed, would steal the silver if they were left alone to
do so, that is the nature of business, is it not really?
Mr Devereux: A large part of the
economy, if that is the way you think about it.
Q103 Mr Davidson: Indeed; I understand
that. But you are there presumably to guard the spoons. Was it
responsible of you just to assume that Metronet would set up a
structure that allowed the centre to have control over the individual
companies? Ought you not to have been exercising some sort of
supervisory role? At no stage were these difficult issues identified
by you.
Mr Devereux: You are stretching
the limits of my knowledge.
Q104 Mr Davidson: That is what we
are here for.
Mr Devereux: I know. The limitation
is how helpful I can be in an afternoon. It was clearly known
to the Department that the intended structure of Metronet was
the way I have just described. I will go back and check that.
We knew that there was going to be a tied sub-contracting arrangement
underneath it. I do not believe that we had visibility of the
precise information provisions in both sub-contracts.
Q105 Mr Davidson: Why not?
Mr Devereux: Why did we not? For
the reasons I have given earlier which clearly, with the benefit
of hindsight, are not satisfactory. We were assuming that companies
which actually had some degree of money at stake would actually
do this well.
Q106 Mr Davidson: You are assuming.
Is that appropriate? You are putting public money at risk. Was
it reasonable just to assume these things?
Mr Devereux: I cannot but agree
with you that it is not sensible to leave it at that.
Q107 Mr Davidson: But you did.
Mr Devereux: What the Treasury
has subsequently recommended, in giving guidance to writing contracts
like this, is to make explicit provisions.
Q108 Mr Davidson: So the Treasury
have sorted it now in a sense.
Mr Devereux: The contracts that
we let were let entirely consistent with the guidance available
from the Treasury at the time. In the light of this particular
event and others, the Treasury guidance is now tighter as to what
departments should be looking at under sub-contracting arrangements.
Q109 Mr Davidson: So it is the Treasury's
fault.
Mr Devereux: No.
Q110 Mr Davidson: It is just a bad
boy did it and ran away.
Mr Devereux: No, I am not going
to say that.
Q111 Mr Davidson: In the nicest way
you are saying basically that the Treasury has now changed. Surely
you should have been doing that?
Mr Devereux: I was trying to do
that in the spirit of understanding what lessons have been learned
and what is different. What is different now is across Government.
Q112 Mr Davidson: Mr Bolt, following
this exchange we have had, can you cast any light on this?
Mr Bolt: On the point that has
been made so far about the expected approach of the shareholders,
yes, you expect shareholders to make as much money out of a deal
as they can and part of the reason for having the Arbiter is to
make sure that if they exploit that position, so that if London
Underground thinks it is being asked to pay too much, they can
come to me for an extraordinary review or a periodic review. The
surprise was that the company did not put in place the financial
management systems, the risk management systems that you would
expect to enable the shareholders to make a big return on this
deal. When I looked at it in 2006, three years after they had
entered into these contracts, I was still saying their financial
management, their risk management, their asset management was
poor.
Q113 Mr Davidson: Were you the only
one who saw this?
Mr Bolt: Once I was asked the
question, to produce the guidance on their performance, I had
the information powers, including access to the sub-contracts
and if necessary asking the sub-contractors for information. Those
are statutory information powers.
Q114 Mr Davidson: Nobody else asked
you for this.
Mr Bolt: No-one else had been
asked to look at exactly that same question within that structure.
Mr Devereux: I think you will
find that TfL was fairly well seized of the inability to deliver
information that made any sense.
Q115 Mr Davidson: The final point
I just want to pick up on is the question of the lenders. The
whole thing about PPP was meant to be that bankers would keep
their eye on things and be tough and control things and all the
rest of it. Yet it did not happen here because they only had 5%
of their money actually at risk. Was it not foreseeable that they
would take their eye off the ball in these circumstances?
Mr Devereux: It depends whether
you write down the figure 5%: surely that does not sound enough
to get out of bed for? Or you write down £190 million. Personally,
for £190 million I would get out of bed. I do not think it
is obviously foreseeable that just because it was 5% they would
not take any action.
Q116 Mr Davidson: So do you disagree
with the lines in the Report here which refer to the bankers,
paragraph 2.23 "They did not have sufficiently strong incentives
to do so" that is protect their investment "because
only five per cent of their investment was at risk".
Mr Devereux: I am going to argue
that £190 million ought to be enough for a banker to get
out of bed and protect the investment.
Q117 Mr Davidson: But it was not.
Mr Devereux: Clearly; by the fact
that after the fact we know they have not protected it adequately,
then that must be correct.
Q118 Mr Davidson: So they are a bad
lot basically.
Mr Devereux: Those are your words.
We know a lot more about banks now than we did previously.
Q119 Geraldine Smith: I have to admit
my ignorance on this subject before coming to this meeting. I
am not a London MP so I suppose I have not taken a great interest
in this matter. One thing I have picked up on very quickly and
am amazed you seem to have missed this point is that if someone
only has 5% risk whilst the taxpayer has 95% risk that does not
seem a very good deal to me. I think that would have raised alarm
bells to start with, especially when you look at some of the companies.
Thames Water, EDF Energy, Balfour Beatty, all companies who know
exactly what they are doing, get together and say they want to
be the shareholders for this new company but if they need to they
can get out with very little risk.
Mr Devereux: When your Committee
looked at this in 2004, you were perfectly clear that there were
different ways of doing this. The Committee concluded bond financing
would have been cheaper than the PPP financing costs though the
risk of non-performance would then fall directly to the public
sector. So the question which was trying to be assessed when these
deals were being structured was whether a deal with a 95% guarantee
in it was a better deal nonetheless than leaving it with London
Underground to do. That is the test that my predecessor was seeking
to work out, on a value for money basis, and the conclusion and
all the evidence was that it was a better deal to do. You may
argue that it would have been an even better deal if somebody
had been prepared to do it with no guarantee at all, but that
was not the question in front of us. The question in front of
us was whether to put this money back into London Underground
or to do it differently. A value for money assessment was made,
and that choice was actually in favour of the PPPs. Simply to
say now that "surely it was obvious that with 5% the whole
thing could ... ", actually it was not obvious, no.
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