Examination of Witnesses (Questio Numbers
160-177)
DEPARTMENT FOR
TRANSPORT AND
LONDON UNDERGROUND
PPP ARBITER
19 OCTOBER 2009
Q160 Mr Bacon: Surely that is why
you pay a lawyer £29 million for every conceivable circumstance,
is it not?
Mr Devereux: You might hope so.
Q161 Mr Bacon: Yes, I would have
thought so. The other thing is that I can understand why you might
have thought that Balfour Beatty and W S Atkins and all these
folk who have £500 million in the pot might have taken a
bit more notice how the thing was being managed and risk managed
and so on.
Mr Devereux: Yes.
Q162 Mr Bacon: I also might have
understood why the banks did not take that much notice because
they knew perfectly well, based on the guarantee and on your comfort
letter, that they were pretty much covered. However, just as the
equity holders were in for a big piece and therefore you might
have expected that they would take a serious interest in it, you,
on behalf of the taxpayers knew you were in for a big piece because
you had to be. You were paying this £1 billion a year grant
and that was being used to pay the annual unitary charge ultimately
by London Underground. So you too knew that you were in for a
big piece. What comes through again and again in this is that
the Department for Transport was taking quite a hands-off approach.
Should you not have assumed, just like you did for the equity
holders that being in for that much money would have caused you
as the Department for Transport to take a tighter, closer grip
just in the same way as you were expecting the equity holders
to do?
Mr Devereux: I understand the
question. I just disagree with the answer which is simply this.
The way I would have prevented this loss occurring would have
been to structure the contract between LUL and the "infracos"
differently. I do not believe actually it would have helped matters
to have structured the contract to put three players in play with
some sort of walk-on rights for the Department in certain circumstances
to do somewhat unspecified things. The thing I could have done
with the contract, even keeping it simply between two parties,
LUL and the "infraco", would have been to have changed
the nature of the Arbiter's role and in particular, when he found
there was either no information or the information led him to
conclude that there was no risk of them burning their equity and
their debt—
Q163 Mr Bacon: That he would have
been able to do something about it.
Mr Devereux: That he would have
given LUL—LUL not me—the right not to pay the infrastructure
service charge. That would have self-regulated that arrangement
and I regret that it was not in the original contract.
Q164 Mr Bacon: You referred earlier
to dialling down the price. Do you think though that if that had
been included at the time, if I had been a private sector participant
I would have said "If you want that ability to dial down
the price then I am going to make the price higher to start with"?
Would that not have been the obvious corollary of that?
Mr Devereux: It might have been.
Let us just think about it. What we are just saying is that the
only circumstances in which we would be dialling down the price
would be the circumstances in which the Arbiter had reason to
believe—and it would have to be a reason to believe because
he would not have finished a review—that the uneconomic
cost, the inefficient cost to this company was getting close to
£540 million. It seems to me that for a company then to turn
round and say "Who knows? Maybe I will get close to £540
million. I will charge you more for the privilege" ... They
might have done but you might have hoped that in the process of
getting a competed contract structured on that basis they might
have thought "That is a reasonable way of doing it. I know
I have equity at risk. If that actually goes through, why would
the public sector come and bail me out?".
Q165 Mr Bacon: You have painted a
reasonably plausible explanation of why the Department for Transport
was slightly distanced from it all. I am not sure I completely
buy it but I see where you are going with it. You also said that
Metronet did not have much control over what it got its contractors
to do. It is also the case that London Underground did not. It
says in paragraph 12i, page 7 of the main Report "London
Underground did not have sufficiently detailed information to
take a `partnering approach' with confidence and did not have
the full array of contractual levers". We understand that
the Department for Transport did not have all the levers but London
Underground, according to the Report, did not have the full array
of contractual levers to drive improved performance where necessary.
It seems that nowhere in the system was there anyone designed
through all this expensive legal advice, to have enough contractual
grip. Was there?
Mr Devereux: The bit about London
Underground's views are, I have to say, somewhat contested by
different parties.
Q166 Mr Bacon: Which brings me on
to my next question.
Mr Devereux: You will recall the
Mayor's attitude to the PPPs. Just in case I needed it I brought
with me Tim O'Toole's own observation about information powers
when he was in front of your Transport Select Committee.
Q167 Mr Bacon: Which question number
because I have it in front of me as well?
Mr Devereux: It is question 240,
"Mrs Ellman: Mr O'Toole, you said that a major problem was
lack of information". Mr O'Toole said that there should have
been more transparency, more accurate information. "I think
there has been a concern on the part of all the infracos that
more information to LU would mean that LU would meddle more, would
want to take more control, and I think further if you consider
the political climate when we took over, with the things that
the Mayor has said and what Bob Kiley ... had said, there was
a real concern that information would be used in ways other than
to manage the contract for the purposes of maybe rhetorical argument".
So when London Underground tells you that they do not have all
the information which they would like, bear in mind that Tim is
acknowledging that people's perceptions of quite what information
they were after, and for what purpose it would be used, were being
argued over. I am not saying that is a defence for no information,
but these contracts were set up essentially as outcome specifications
and the proposition was "That is what I expect you to do.
I will pay you month in month out if the availability of trains
is at this level, if the ambience of the stations is at this level,
if the service is at this level. I am paying you for delivery".
That is what the contract said. It does not require obviously
a very detailed grip. Tim's background is managing contracts with
every single jot and tittle of things written down at the start.
It is a perfectly good way of running contracts. It is not obviously
one which drives out innovation like changing escalators from
six months to six weeks. We were paying for a contract that actually
provided some space for the private sector to do something better
and differently, and, in some regards, I am going to argue that
is what you got as well.
Q168 Mr Bacon: Do you and the Department
discuss with the NAO who comes as witnesses to these hearings?
Mr Devereux: I ask to bring some
people and sometimes you invite people.
Q169 Mr Bacon: You did not ask to
bring the current managing director of London Underground.
Mr Devereux: No.
Q170 Mr Bacon: It is just that in
2004 Tim O'Toole came.
Mr Devereux: I think you might
have asked him.
Q171 Mr Bacon: He is described on
the web—this is Mr Richard Parry who is the current managing
director of London Underground—as being responsible for
leading the largest transformation programme the Tube has seen
in generations. I should have thought he would have been a quite
useful witness for us to have had. I just wondered whether you
had any discussions with the NAO which had led to him not being
a witness today.
Mr Devereux: As I understand it,
you are allowed to invite whomever you wish.
Q172 Mr Bacon: Ultimately we do invite
whom we wish but you could rely on the advice of the NAO. I know
from previous hearings that is often on the basis of discussion
with the department and I am just wondering what discussions took
place, if any, on this occasions.
Mr Devereux: I made clear that
I expected to bring with me Paul and Chris. I have not gone out
of my way to get LUL to come.
Q173 Mr Bacon: May I just ask why
you did not get LUL to come? Given that description I have just
given would he not have been an obvious person?
Mr Devereux: Having read the Chairman's
press notice and expected the questions to be about the role of
the Department, I thought you would expect to see the Department.
Mr Humpherson: We advised the
Committee to invite the Department because the Report is about
risk management undertaken by the Department and managing the
taxpayers' exposure to unexpected costs and to loss. We had no
discussions with the Department about whom they might invite as
accompanying witnesses.
Q174 Mr Bacon: Why did we have Tim
O'Toole in 2004?
Mr Humpherson: I think probably
in the 2004 Report we were talking about the prospect of making
the contracts a success and in those circumstances having all
of the contracting parties available to answer questions seemed
sensible. This Report is about the taxpayers' exposure to loss.
Mr Bacon: It still talks about London
Underground. It still talks about the fact that they did not have
the full contractual levers available, so I think it would have
been useful to have them.
Q175 Mr Mitchell: Looking at Metronet
and trying to place it in the catalogue of great British disasters,
there was another contract with Tube Lines. Why was that comparatively
okay whereas this was such a mess? Was it that Metronet took on
more difficult lines and stations? Was it a different contract?
Was it the corporate governance of Metronet which looks to be
a coalition of suppliers out to make a bob or two by supplying
the work and they dominated the corporate governance? Which of
those explanations explains the failure of Metronet and the comparative
success of Tube Lines?
Mr Devereux: Personally I would
put it largely down to the culture which has been created in Tube
Lines which is "This is the contract. We're going to deliver
it at the price we bid for" and actually that is what we
have had. That is what shines through the evidence given to the
Transport Select Committee when you have had the chief executive
in front of you. They have indeed majored—and this is the
nature of their shareholders, by having the involvement of Bechtel
and the like—on very good programme and project management.
Tim O'Toole speaks very highly of the very, very strong grip which
Tube Lines has over its contractors. They have put all of their
work out to tender.
Q176 Mr Mitchell: They have the same
guarantees, do they?
Mr Devereux: They have the same
guarantees. They put all their work out to competitive tender
and when they had problems with sub-contractors they brought the
sub-contractors back in-house. They have gone at this subject
in a way which, I am going to assert, we assumed that somebody
with that much money at stake would actually do. To date they
have done very well. They still have to deliver the Jubilee Line
upgrade so I am not going to make promises about things which
we have not finished yet. They have clearly made a much better
fist of this than Metronet.
Q177 Chairman: That concludes our
hearing. We are not going to quibble about sums but at the end
of the day the taxpayer has lost up to £410 million. Acceptance
is a first step towards change; that is what our wives tell us
anyway. We hope that the DfT will now improve in the future, although
you have not really been prepared to admit through this hearing
that there has been a failure in the past. Perhaps you have given
us a grudging apology but I was struck by one strange thing you
said to Mr Bacon just now. You said that you could not foresee
a shipwreck. I would have thought it was very possible that these
kinds of projects might end in shipwreck. That is why you have
all this extremely expensive advice to the tune of £130 million.
Anyway I am going to give you the last word. You can give an apology
if you wish, because acceptance is the first step towards change.
Mr Devereux: I thought what I
said to Mr Bacon was that we did not expect a shipwreck and did
not provide for it. I am saying, with the benefit of hindsight,
since you want to have lessons learned, that clearly a reliance
on private sector money being at risk is insufficient. You may
argue that we knew that all along. It clearly was not part of
the conversation that we had back in 2004. It was not included
in the contract. That was a mistake. Had that been included we
would not be discussing this loss today.
Chairman: Thank you very much and thank
you to your colleagues.
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