Examination of Witnesses (Questions 111-226)
JIM CLUNE AND JAMES RAWLE
4 NOVEMBER 2010
Q111 Chair: Good morning,
everyone. Thank you, Mr Clune, for coming in again today. Some
of the questions that we ask you will be similar to the ones that
we asked at the informal meeting that we had at the Severn bridge.
We are asking them again because your answers will be recorded
as part of the official record.
Even though we all know who you are, could you
please introduce yourself and your colleague for the record?
Jim Clune: My
name is Jim Clune and I am the general manager of Severn River
Crossing plc. My colleague is James Rawle, who is the deputy general
manager.
Q112 Chair:
Thank you, and welcome. We have a number of questions to ask
you over the next half hour, and I will ask the first question.
Could you outline the terms of the concession? My understanding—and
I will put it in very simple terms—is that you took on the
debt of the existing bridge of £122 million. You built the
new bridge, the cost of which came to about £330 million.
The total is therefore about £450 million. You were told
that, in return, you would be able to collect up to just under
£1 billion in revenue, and, once that money had been collected,
that would be the end of the agreement. In broad terms, is that
the agreement?
Jim Clune: Yes,
that is correct. I will just clarify that the cost of the second
crossing, including VAT, was £390 million. The net cost,
exclusive of VAT, was £330 million.
Q113 Chair:
You got the VAT back, presumably.
James Rawle: No,
we did not.
Q114 Chair:
Oh, I see. So, your outlay for this was £510 million.
Jim Clune: Expressed
in 1990 prices, yes.
Q115 Chair:
For a return of £1 billion.
Jim Clune: Yes,
and the approximately £1 billion tolling revenue is a sum
that is expressed in 1989 prices.
Q116 Chair:
I understand that, so the real-terms figure will be higher
than that.
Jim Clune: Yes.
Q117 Chair:
Okay. What, roughly, do you have to spend on maintenance each
year?
Jim Clune: The
best way that I can express that is to say that, in 2010 prices,
we are spending approximately £12 million a year on operating
costs. That includes the costs of inspecting and maintaining both
of the crossings, but also of collecting the tolls, so it is a
total operating cost in 2010 prices.
Q118 Chair: What
do you estimate that that would be in 1992 prices, that is, the
prices that we are using to calculate the £1 billion?
Jim Clune: I
would have to do a mathematical calculation to arrive at that
figure.
Q119 Chair: It
would be significantly less, would it not? It would be
about half of that figure.
Jim Clune: It
might be—I could not say for certain.
Q120 Geraint Davies: So,
if we add all that up, it gives you a gross profit of around £0.5
billion, less the ongoing £12 million a year. How much profit,
therefore, will you have made out of this venture?
Jim Clune: It
is not just a question of the construction cost and the ongoing
maintenance cost. There has been, and continues to be, a very
considerable cost associated with the financing. At the beginning
of the concession we took out a considerable amount of debt financing
to finance the project, and those costs continue to accrue. So,
it is not just the second crossing construction cost.
Q121 Geraint Davies: Right.
Presumably, given that the Bank of England's independence
has brought down long-term interest rates, you have been able
to restructure your debt to reduce your debt costs and make more,
rather than less, money. In that case, how much money did you
make?
Jim Clune: Again,
it is not as simple as that. Some of the outstanding debt instruments
that we have at present are not linked to the Bank of England
base rate. We have a debenture stock financing that is more than
6% payable, so it is not linked to the Bank of England base rate.
Q122 Geraint Davies: Fair
enough, but, in the round, just so that we have a basic idea,
as the Chair said, we are looking at revenue of around £1
billion and half of that will go on various debt costs that have
been re-managed. Are you able to say, ultimately, how much money
you have made?
Jim Clune: We
cannot say at the moment, and I will explain that by saying that
the way in which the project finance agreements are written means
that the company and its shareholder investors are not entitled
to take any profit or dividend until the very end of the concession.
So, it is a 25-year or 26-year investment period. If we have done
our sums correctly with regard to the construction cost and the
maintenance cost, there may be a profit. We are still seven years
away from that, and we cannot say at the moment what that profit
will be.
Q123 Geraint Davies: I
would not have had the money, but if I was an organisation and
had put in £10 million, say, into this, I would have no idea
what my return would be in seven years' time, is that right?
Jim Clune: It
is very uncertain. Traffic volumes and revenues have been badly
affected by the recession. We hope that that will improve over
the next few years, but it is not certain at present that there
will be a profit.
Q124 Jonathan Edwards: I
was going to come at this from a slightly different angle, but
you have started to cover it already. I want to probe a bit more,
following Geraint's question, what profits were you projecting
to make at the beginning, because you had to make a case to get
the money in the first place.
Jim Clune: If
you look at the concession agreement that we signed with the Secretary
of State for Transport in 1990, there is a notional sum in that
of £51 million. That was a target or an expectation.
Q125 Chair: That
was expressed in 1992 prices, was it?
Jim Clune: It
was expressed in 1989 prices. It was never guaranteed. It was
a target, and our revenues have been significantly affected in
recent years.
Q126 Owen Smith: Nice
to meet you again, Mr Clune. As you have gone through the various
processes of refinancing, with subsequent prospectuses produced
and subsequent projections produced by the company for shareholders
in order to give them some certainty about the sort of returns
that they might get, have you not got some further idea about
this? I think that we have all found it slightly surprising that
there is no notion—which is what you seem to be suggesting—of
how much money you might expect back at the end of all this.
Jim Clune: When
VAT was introduced on tolls in 2002, following a judgment of the
European Court of Justice, with the agreement of the Secretary
of State for Transport at the time, there was a refinancing to
enable the financing of the VAT. If you recall, the Government
made a commitment at that time that the customer would not pay
the VAT, hence the toll rates had to be deemed to be VAT-inclusive
from 1 February 2003. To accommodate that finance, the Secretary
of State and the company agreed a refinancing. Part of the result
of that was that an interim dividend of £12 million was paid
at the time. In 2002, there was an expectation, even then, that
there would be a further dividend. However, at this point in time,
that is not certain.
Q127 Owen Smith: So,
at that point, was it not identified what the subsequent further
dividend might be expected to be?
Jim Clune: It
was. The target was something like £32 million. Again, it
was a target, an expectation, but not a guarantee.
Q128 Owen Smith: Did
the agreement between the Secretary of State and the company originally
stipulate that there would not be a projected sum, or, rather,
that the company would not take any profits during the period
of the concession? Or was that a decision made by the company
with regard to the way that it structured its finances?
Jim Clune: That
was not contained in the concession agreement. I believe that
that was more a product of the finance agreements.
James Rawle: It
was more a product of the debt finance agreements, yes. Clearly,
the lenders did not want shareholders taking money out that could
be used to pay debt.
Jim Clune: Given
that the project was heavily debt-financed, as James has said,
the lenders wanted confidence that their loans would be repaid
before any dividend was payable to the company. The very last
of the debt instruments to be repaid is the Government debt.
Q129 Chair: I
have just been scribbling things down here as you have been speaking,
and, based on your figures of costs of £510 million in 1989
prices to begin with, and on an average figure of, say, £6
million at 1989 prices for maintenance, by 2017, you will have
accrued costs of around £660 million in 1989 prices. If your
figures are accurate and you finish collecting the £1 billion
in revenue by then, you will have made a profit of around £440
million in 1989 prices, which will, of course, be significantly
higher in 2017 prices. That is obviously a rough estimate, but
does that sound wildly inaccurate to you?
Jim Clune: I
think that that does not take account of the considerable costs
of financing the debt.
James Rawle: The
financing costs are very significant. If you look at the accounts
for the past few years, you will see that we are talking about
mid-£30 millions per year in financing costs.
Q130 Chair: In
1989 prices or current prices?
James Rawle: No,
no, obviously, it depends how much you are borrowing at any point
in time.
Q131 Jessica Morden:
With regard to current toll prices, under the Severn Bridges Act
1992, the Secretary of State cannot set the tolls below the level
set by the retail prices index without your agreement as the concessionaire.
In the current economic climate, lots of people are calling for
a toll freeze. Is that something that you would consider?
Jim Clune: As
you probably know, each year, we get an Order from the Secretary
of State fixing the toll prices for the following year. We expect
to get that in early December this year. The finance agreements
that we have with all our lenders oblige us to charge the toll
calculated under the Severn Bridges Act.
Q132 Jessica Morden: Is
there an argument for saying that you could collect the tolls
over a longer period and that you could, therefore, reduce the
tolls and the burden on commuters and business by extending the
tolls further into the future?
Jim Clune: It
is probably a mathematical possibility, but it would have to be
the Secretary of State who would agree to a longer toll-collection
period. We do not have the facility to decide on that. It would
be a matter for the Secretary of State.
Q133 Chair: To
be clear, you mean the Secretary of State for Transport rather
than the Secretary of State for Wales, do you not?
Jim Clune: Yes,
that is right.
Q134 Jessica Morden: Do
you hear the concerns of business and local commuters about the
steady increases in the tolls?
Jim Clune: We
are certainly made aware of those concerns from time to time.
Q135 Jessica Morden: Has
there been an economic impact on the scale of toll traffic?
Jim Clune: We
do not actively survey that. Like all businesses, our business
has suffered during the recession. Heavy goods traffic is down
by up to 15% year on year. We are seeing levels of heavy goods
traffic that are the same as 1998 levels. Like all businesses,
crossings have suffered during the recession, though I cannot
quote any surveys or detail on that.
Q136 Owen Smith: I
would like to come in on that point. You brought the issue of
reduced heavy goods traffic volume to people's attention a few
weeks ago. Have you done any analysis on whether that is to do
with the toll and the costs that it brings, or whether it is to
do with better stock management, different logistics and modes
of operation by the companies? I believe that there is reduced
heavy goods traffic across the road network in the UK.
Jim Clune: We
keep in close contact with other toll operators in the UK and
in Euroland. Very similar figures are being quoted from elsewhere;
this is a universal trend, and it has been for the last two or
three years. Anecdotally, we believe that hauliers are being more
efficient in managing their loads, which I am sure they have to
be. The percentage reductions in traffic that we are quoting are
universal, both in this country and further afield.
Q137 Geraint Davies: We
are interested in freezing the toll and extending the franchise
to reduce the economic burden on trade to Wales. If the franchise
were to be extended by five years by the Secretary of State, do
you know by how much the toll could be reduced?
Jim Clune: We
have not carried out that kind of analysis.
Q138 Geraint Davies: Do
you have any idea of what the price elasticity of demand is for
using the bridge? In other words, if the price was halved, would
that significantly increase the traffic?
Jim Clune: It
is very difficult to say. When the second crossing was completed
in 1996, there was a step change in the volume of traffic. Clearly,
additional demand existed at that time. We do not have any statistical
data at the moment regarding price elasticity of demand.
Q139 Geraint Davies: If
you have a new bridge, you have more people coming over. The big
question is whether more people would come over if you reduced
the price. However, you have no idea how this would vary.
Jim Clune: Both
crossings do not operate at maximum capacity all the time. On
bank holidays or at other busy holiday periods, we achieve maximum
capacity on one or two days of the week. However, much of the
time, both crossings do not operate at maximum demand.
Chair: We are going
to need to speed through this now.
Q140 Guto Bebb: In
terms of the current legislation, what flexibility do you have
to offer differential pricing, such as off-peak or frequent-use
concessions?
Jim Clune: Within
the legislation and the concession agreement with the Secretary
of State for Transport, we are required to offer discounts. At
the end of the session, I would like an opportunity to clarify
a point of evidence from a previous session. The electronic tag
system that we operate offers significant discounts to regular
users. Beyond that, we do not have any more flexibility within
the legislation and the concession agreement. However, we offer
discounts through our electronic toll-collection system.
Q141 Chair: Anyone
using the toll system more than 20 times a month under one of
the tag schemes would get a discount, would they not?
Jim Clune: I
think that it is 22 crossings. Fleet operators and haulage associations
use our season tag very efficiently.
Q142 Jessica Morden: What
do you anticipate the tolls will be in January?
Jim Clune: The
answer is that we do not know. We are waiting for an order from
the Secretary of State. We would normally expect to receive it
at the end of November or in the first week of December, but at
this point in time, we do not have that information.
Q143 Jessica Morden: Would
you anticipate that it will be the normal increase?
Jim Clune: If
it were to follow the pattern of previous years, it would be a
retail price index increase. However, that is a matter for the
Secretary of State for Transport.
Q144 Jessica Morden: Is
it quite late for you to be hearing about this?
Jim Clune: No,
this is about the normal time.
Q145 Jessica Morden: What
do you anticipate will happen with the increase in VAT?
Jim Clune: Our
understanding is that a ministerial statement was made in the
past few months that said that, as in 2003, the additional VAT
would not be passed on to the customer. You would need to check
that with the Highways Agency, but that is my understanding.
Q146 Jessica Morden: Have
you not had any indication from the Department for Transport on
that?
Jim Clune: No,
nothing official.
Q147 Guto Bebb: The
last time that we met, we discussed the fact that you were going
to introduce credit card payment facilities during the Ryder Cup.
Was that a success?
Jim Clune: It
was a success in the sense that we had the system in place in
time for the Ryder Cup, which was a commitment that was given
by the Highways Agency and us. It was a temporary system. It caused
a longer transaction time than we would have liked, but it worked.
Chair: I would like
to bring in Nia Griffith on credit card payments.
Q148 Nia Griffith: There
has been an enormous amount of discussion in the press on this
issue. Perhaps we could look at the reasons why it took so long
to bring in the credit cards, in the first place, and why we had
the extraordinary situation where it was decided that the red
carpet would be put down for the Ryder Cup and rolled up again
once it was over, and that the system would be reintroduced later.
How has it come about that you have gone through that kind of
flip-flop so many times, and what do you think will happen with
this in the future?
Jim Clune: I
will explain the background to the credit card issue. The Severn
Bridges Act 1992 precluded card payments. It mandated that payments
would only be made by cash or the electronic toll collection system.
The Highways Agency and the Department for Transport changed the
legislation earlier this year—in March, I believe—to
permit the use of credit cards. We have been planning to put the
system in place since then. We had a number of difficulties in
putting the temporary system in place for the Ryder Cup. Subsequent
to the Ryder Cup, we have suspended the system temporarily so
that we can refine our process, try to improve the traffic throughput
times and improve the system generally. We will have a full, permanent
system in place in the first quarter of next year. In the meantime,
the 'temporary system', as we call it, will be back in place shortly.
Q149 Nia Griffith: Did
you push for that change in the legislation in March 2010 or was
it entirely down to the public?
Jim Clune: We
were aware of advances in customer complaints about credit cards,
which we and the Highways Agency received. I would not say that
there was a huge incidence of complaints, but this clearly needed
to happen to modernise the system.
Q150 Nia Griffith: As
it was a short period, it was difficult to judge usage. However,
based on the evidence that you have received to date, what percentage
of people would you anticipate would use credit cards?
Jim Clune: It
is interesting, even though the week of the Ryder Cup was a snapshot
and cannot be indicative. We were surprised that take-up during
that week was only about 2% of our total traffic. I am aware that
we and the Highways Agency had given people notice that it would
take longer to pay by credit, and people might have been influenced
by that. I am not able to say what take-up would be in the future.
Q151 Nia Griffith: Chair,
I think that that is an important point. I am not terribly surprised
by that, because most people would pay by cash if they had the
change. Having said that, it is vitally important that the facilities
are there, however small the percentage may be. We all have been
in the situation when, thank goodness, we have been a bit untidy
and found some coins on the floor of the car. It is the only way
to avoid the embarrassment of being accompanied by the police
to a cash point. Therefore, even if it is a very small percentage,
will you undertake to keep that facility there, because it does
save embarrassment?
Jim Clune: We
will be keeping the facility in place.
Q152 Chair: I
would like to add to this. When we had the informal meeting, a
few weeks ago, my understanding was that this system would stay
in place in some form. Then, we read that it has been removed
and will be introduced by the first quarter of the year.
Jim Clune: It
will be back in place in a matter of days. This is a continuation
of the temporary system. It will be replaced by a permanent system
in the first quarter of next year, but in the meantime we will
keep the temporary system running.
Chair: That is great.
Jim Clune: It
was always our intention to have a temporary suspension to improve
staff training and to try to refine the system and improve the
throughput time.
Q153 Chair: We
thank you for that. In some ways it must be advantageous to you,
because there must be quite a significant cost in dealing with
all of that cash with the funding of security vans and so on.
Jim Clune: There
is an associated cost. Once again, if there is an opportunity
at the end of the session, I would like to correct a matter of
detail from some previous evidence that we received.
Chair: If it is
quick, please feel free to do so now and it will be on the record.
Jim Clune: I
read in a transcript of evidence recently that a figure of £90
million was quoted as being our revenues. The £90 million
includes approximately £12 million or £13 million of
VAT, which we pay on to Her Majesty's Revenue and Customs. Therefore,
our actual net revenue is approximately £77 million in 2010
prices. There was also reference to £90 million in cash,
collected in coinage, which is not correct. Of the £70 million
or so in revenue that we currently collect, approximately 30%
is collected through our electronic automatic vehicle identification
system, which involves direct debit. It is cashless. The balance
is not all coinage; a significant percentage of that is in the
form of notes.
Q154 Chair: I
suppose that that would still incur a cost.
Jim Clune: There
is a cost. It is not a huge cost; it is managed very efficiently.
Q155 Chair: Have
you ever considered using a company—I am not advocating
any particular company, but some have written to us; one is well
known for operating car parks at railway stations—that has
a system where you simply pay by credit card before you undertake
your journey? You could then just drive straight through, because
the camera would recognise the car. Companies have told us that
they would be willing to install all of this for free.
Jim Clune: We
have very much considered that in the past, and the linkage with
automatic number plate recognition technology. The difficulty
that we have is that vehicle toll classifications on the Severn
crossings do not lend themselves to automatic number plate recognition.
The best example that I can give is that of a Vauxhall Corsa private
car and a Vauxhall Corsa commercial van, both of which return
an identical footprint from the Driver and Vehicle Licensing Agency.
We could not distinguish between the categories. In addition,
our investigations have revealed that the DVLA database is not
100% accurate. People make modifications to vehicles and they
do not necessarily tell the DVLA. Therefore, we have investigated
the issue of automatic number plate recognition. It would need,
primarily, a change in the toll classifications that were established
in the Seven Bridges Act.
Q156 Chair: Is
that something that we should be considering?
Jim Clune: One
of the additional difficulties is that if you look at all tolling
operations within England and Wales—Scotland does not now
have tolling—you will see that, at each of those operations,
the toll vehicle classifications are different. There is no commonality
between operations. In theory, it would be possible to change
the classifications, but that would need a change to primary legislation,
which is the Severn Bridges Act.
Q157 Nia Griffith:
How big are the attempts to implement that uniformity across all
of the different tolls? Are you saying that, because of the legislation,
you are not in a position even to open discussions with other
toll bridges?
Jim Clune: I
am aware that the European Union has published a model library
of toll classifications for use by member states, but it has produced
a model that contains approximately 36 different vehicle classifications.
It would not be within our powers to change that; it would have
to be a matter for the Secretary of State for Transport in discussion
with all of the operators, possibly based on this EU model.
Q158 Owen Smith:
Very briefly, I noticed that Theresa Villiers said that she thought
that temporary card payments would be back in place this Friday.
You said that it would be back in place in a couple of days.
Jim Clune: I
am aware that a statement was made that it would be back in place
by tomorrow. As we sit here, we are still working towards that,
but it may take a few additional days.
Q159 Owen Smith:
Therefore it will be back in place next week.
Jim Clune: Yes;
next week.
Q160 Jonathan Edwards:
I wish to discuss other technologies. You talked about some of
the difficulties. How does Transport for London get over those
difficulties in relation to the congestion charge? Is there anything
that can be learned from how it adopts that system?
Jim Clune: I
am not completely familiar with the Transport for London model.
I am aware that it uses automatic number plate recognition technology
and DVLA linkage. I would guess that there must be a significant
amount of what we would call violations arising from that, but
I do not know what the percentage is.
Q161 Jonathan Edwards: Under
the terms of the concession agreement, who would be responsible
for adopting some of those new technologies? Would it be the Department
for Transport or Severn River Crossing Plc?
Jim Clune: We
are governed by the Severn Bridges Act 1992 and the concession
agreement, which, as currently envisaged, has seven years to run.
We have a toll plaza on each crossing and that is the technology
that we currently have. It would not be within our remit to change
that technology, particularly given the relatively short time
left in our concession agreement. That would be something for
the Government to consider for a future regime.
Q162 Jonathan Edwards: So,
new technology may be something to look at following the handover.
Jim Clune: I
think that that would be the case.
Q163 Jonathan Edwards: Under
the concession agreement, how is responsibility for the maintenance
of the two crossings divided between Severn River Crossing Plc
and the Highways Agency?
Jim Clune: The
core responsibility for the inspection and maintenance of both
crossings is with our company. However, there is a provision with
regard to the original crossing, whereby if something was discovered
that could not have been anticipated when we took over the project,
and if a significant cost were to be associated with that, then
that risk would remain with the Secretary of State for Transport.
Q164 Jonathan Edwards: Does
the Highways Agency undertake any inspections and, if so, how
frequently?
Jim Clune: All
our inspections are governed by the Department for Transport and
the Highways Agency's regime for the inspection of principal structures.
We are governed by their regulations. We also have bespoke manuals
for inspecting both crossings.
Q165 Jonathan Edwards: Are
the maintenance needs for both bridges similar, or are there any
differences?
Jim Clune: Both
bridges are governed by the DFT principal and general inspection
requirements.
Q166 Chair: There
is an issue, is there not, with the pylons on the old bridge?
Jim Clune: There
is an issue with the main cables on that bridge.
Q167 Chair: Has
that issue now been resolved fully, Mr Clune?
Jim Clune: It
has been resolved to the extent that the problem has been identified.
There have been two significant inspections in the past six years,
and remedial measures are now in place to arrest the problem.
Q168 Chair: Are
those remedial measures expensive and will they be on an ongoing
annual basis, or was the expense a one-off hit that has now been
taken care of?
Jim Clune: They
are relatively expensive measures, and, in accordance with the
standard that has now been accepted for this work, a special inspection
will take place approximately every five years inside the cables
on the Severn bridge, which will be an ongoing project.
Q169 Chair: Who
will pay those costs?
Jim Clune: Given
that it is classified as a latent defect under the concession
agreement, then it is the responsibility of the Secretary of State
for Transport.
Q170 Owen Smith: I
seem to recall from our informal discussion that there was a fairly
important inspection due to be undertaken shortly after we last
spoke. Did that inspection take place and what can you tell us
about what was discovered?
Jim Clune: The
inspection into the main cables on the Severn bridge has taken
place. It started in March/April this year, and the physical inspection
has just been completed. The report on that inspection by the
specialist engineers will not be available until about February/March
next year.
Q171 Owen Smith: Are
you able to give us any indication as to what it will say?
Jim Clune: The
indication that we have had is that the condition of the cable
is certainly not worse than it was when the first inspection took
place four years ago. So, at the very least, the condition has
stabilised.
Q172 Geraint Davies: The
technology for a more sophisticated system is clearly available,
as we see in London with the congestion charge, but there seems
to be a lack of appetite from your side to introduce it, in the
knowledge that your concession is coming to an end. Is that a
fair summary?
Jim Clune: Given
that we have a toll plaza on each crossing, it would be difficult
and very expensive to dismantle the existing technology and replace
it with some kind of free-flow or GPS technology. That would be
very difficult.
Q173 Geraint Davies: Do
you accept that that should happen in the future? Do you also
accept that people coming into Wales from, say, London, which
has a modern system, being faced with an antiquated system, with
not even the modern technology to use credit cards, which means
that people have to scratch around for coins, is a problem for
Wales, given that the bridge is the gateway to the Welsh economy?
Jim Clune: If
you look at the technology used in other countries, such as the
USA and elsewhere in Euroland, you will see that either free-flow
technology or GPS collection are the technologies of the future.
Q174 Geraint Davies: So,
what would need to happen for you to have an incentive to bring
that forward now, or is it impossible and we will just have to
wait until 2017?
Jim Clune: It
would mean physically dismantling two significant toll plazas,
which would be a significant amount of civil engineering work.
Q175 Geraint Davies: However,
that will happen, will it not? Given that it will happen at some
point, surely it should happen now from a consumer point of view.
What would need to happen? Is it not possible from your perspective
because you are running the old contract until it ends, so that
it is a case of seeing what happens?
Jim Clune: We
are continuing to operate the technology that we have, and given
that the end of our concession is now seven years away, the expense
and the difficulty of converting at this stage would be totally
disproportionate to the benefit.
Q176 Geraint Davies: Finally,
you say that it is only seven years, but in terms of other technology,
such as mobile phones, people think, 'I had better not have a
mobile phone for more than 12 months, because there'll be a new
innovation'. Yet you are saying that for simple things, such as
free-flow technology, which already exists in London, let alone
Singapore and elsewhere, we will have to wait around seven years
with this cart-and-horse system because, in your terms, it is
not a very long time. However, for consumers in a modern economy,
that is nearly a lifetime and it gives the wrong impression of
Wales, does it not?
Jim Clune: I
can only say that we are continuing to operate the technology
that we have and that is operated by all the other tolling operations
in England and Wales—
Q177 Geraint Davies: However,
it is not used for the London congestion charge.
Jim Clune: No.
Chair: Thank you;
we had better keep moving forward.
Q178 Guto Bebb:
I want to take you back to maintenance. How many staff members
do you have working on the routine maintenance of the bridges?
Jim Clune: On
the inspection and maintenance side of the business, we have about
80 to 90 people.
Q179 Guto Bebb: What
would be the routine maintenance that you undertake on a regular
basis? What would be the normal, routine maintenance for the bridges
in question?
Jim Clune: It
is a complete raft of items. The Department for Transport regime
dictates that you carry out a special principal inspection of
the crossings every six years. We have an in-house team of inspectors,
so we undertake a rolling inspection. So, we are doing something
like a sixth of that every year. A principal inspection involves
inspecting every component part of the bridge within touching
distance, so it is everything from the cables to the pylons, and
from the surfacing to the movement joints. It is every component
part of the crossings.
Q180 Guto Bebb:
What is your health and safety record in relation to the maintenance
work that you undertake? How does it compare with the Highways
Agency's, for example? Is it better or is it worse?
Jim Clune: I
cannot quote statistics for the safety record of the Highways
Agency, but in the time that we have been operating, since 1992,
our safety record is excellent.
Q181 Owen Smith:
I have a few more questions on finance. Picking up on the points
that Mr Geraint Davies made a moment ago, how often do you talk
to the department about the financing deal and the sorts of technological
innovations that could be implemented?
Jim Clune: We
have a regular dialogue with the Highways Agency on a whole range
of issues, and it has copies of our annual and semi-annual accounts.
Q182 Owen Smith: What
would it take under the terms of the agreement for the Secretary
of State to stipulate that he wanted you to look at introducing
new technology on the bridge?
Jim Clune: It
would probably require an instruction from the Secretary of State
for Transport under our concession agreement, and there are provisions
for instructions to be made to look at additional works, new projects
or new technology.
Q183 Owen Smith: What
provision is there under the terms of the agreement for the Government
to get some insight into the anticipated revenues that you might
receive at the end and therefore test the ability of the company
to withstand some of the costs of implementing new technology?
Jim Clune: The
department and the Highways Agency are fully au fait with the
information on our revenue stream and our projections.
Q184 Owen Smith: Who
are the principal shareholders in the company?
Jim Clune: The
principal shareholders are John Laing plc, VINCI plc, a multinational
construction group, Barclays Capital and Bank of America.
Q185 Owen Smith: So,
effectively, there are four shareholders.
Jim Clune: There
are four equity shareholders in the company.
Q186 Owen Smith:
You mentioned the debenture loan, and the debenture shareholders
that you have subsequently. Is that separate?
Jim Clune: It
is separate. It is stock that was issued in 1992.
James Rawle: Yes,
£131 million-worth of stock was issued in 1992. There are
about 250 debenture stockholders, and the larger holders tend
to be the pension schemes, but there are a few smaller stockholders
as well.
Q187 Owen Smith:
Individuals?
James Rawle: Yes.
Q188 Chair: One
of the things that I hear bandied around the shops and hostelries
of Chepstow is that it is all owned 'by the French'. Perhaps we
can put that one to rest now.
Jim Clune: I
am happy to put that one to rest. VINCI, the French and multinational
construction group, holds 35% of the equity of Severn River Crossing
plc; however, Severn River Crossing is a 100% UK-registered company.
Q189 Chair: Going
back a little bit, presumably the bid that was put together by
those four companies was chosen purely on the grounds of cost.
Jim Clune: The
initial bid was chosen on the grounds of cost for the financing,
design and construction of the second crossing. It was always
the understanding that the winner would then negotiate a concession
with the Secretary of State for Transport.
Q190 Chair: So,
it is reasonable to assume that, had it gone to a different organisation,
it would have been more expensive, because yours was the cheapest
bid. Therefore, the tolls would either have continued for longer
or at a higher price.
Jim Clune: That
is quite possible. The bid was won as a result of a competitive
tender.
Q191 Chair: Just
out of interest, we all keep talking about 2017/18 as the cut-off
date, but the law allows for tolls to be collected for another
five years. Is it not quite likely that you will be asked to continue
collecting them rather than the Government coming in and starting
again with a different toll collector?
Jim Clune: The
Severn Bridges Act contains a maximum period of 30 years for our
concession to operate and, as you say, beyond that, there is provision
for a further five years, where the Secretary of State could ask
us to collect tolls on his behalf. The Secretary of State for
Transport has incurred expense on his account during the period,
including the work that you mentioned on the main cables, so there
is a facility for that to be collected back through extra tolling
revenue during this additional, notional five-year period.
Q192 Chair: However,
we are getting close to the end of this period, so you must have
had discussions with the Department for Transport about what will
happen when that £1 billion is collected.
Jim Clune: Actually,
we have not had those discussions.
Q193 Chair: I
will continue as we have a minute or two. The day will come when
you collect the £1 billion and, as I understand the Act,
if you reach £1 billion first thing in the morning, at 9
a.m., you can continue to collect tolls for the rest of the day.
That could amount to quite a bit. What do you actually get in
a day?
Jim Clune: We
get £77 million divided by 365—I cannot calculate the
answer.
Chair: I cannot
quite do it myself off the top of my head.
James Rawle: It
depends on the day of the week as well.
Q194 Chair: It
is a couple of hundred thousand pounds. So the difference between
reaching your £1 billion at 9 a.m. or 11.59 p.m. could be
a couple of hundred thousand pounds of profit.
James Rawle: I
think that our entitlement ends when what is known as the ACRR
equals the RCRR. So, when the revenue target is reached, that
is the end of our entitlement, as we understand it.
Q195 Chair: I
may have misunderstood, but I was looking through the finer points
of the Act and it looked to me as if it stipulated the money taken
on the day.
Jim Clune: It
may well do so.
Q196 Chair: I
just wondered if there was a possibility of a big donation to
a Welsh charity, perhaps.
Jim Clune: I
would have thought that if the revenue target is achieved at lunch
time on a particular day and we continue tolling for the rest
of that day, then the rest of those tolls go to the Secretary
of State for Transport.
Chair: Right—we
shall clarify.
Q197 Owen Smith:
To go back to the shares—although that was an entertaining
aside—VINCI owns 35% of the shares; could you give us the
breakdown for the other three principal shareholders and the proportion
that the debenture shareholders have?
Jim Clune: John
Laing also has 35% of the equity shareholding, Barclays Capital
has 15%, and Bank of America UK has 15%.
Q198 Owen Smith:
You were also going to explain the debenture share.
James Rawle: A
debenture is not equity stock; it is a form of debt.
Q199 Owen Smith:
What was that raised for?
James Rawle: It
was to finance the project. Of the £131 million that was
raised in April 1992, £62 million was used to pay half of
the Government debt on day one and the balance was used for the
ongoing financing of the construction.
Q200 Owen Smith:
The debenture stockholders are not paid a dividend either—apart
from the one-off dividend that you mentioned earlier.
James Rawle: They
are paid a coupon; they get interest payments on 30 June and 31
December every year.
Q201 Owen Smith:
I have one further question. I understand that none of the major
shareholders takes anything at all on an annual basis, and that
they will be paid their proportion of the profit that is made
at the end of the whole project. So, what happens with the moneys
that are made in profits each year? If your operating cost is
£12 million and you are taking £77 million, what happens
to the remainder? Is it sitting in a bank account somewhere?
James Rawle: It
is sitting in a bank account and it is accumulating to pay down
the next tranche of debt.
Jim Clune: It
certainly is not the difference between £77 million and £12
million. There have been years when, on paper, we have declared
a small profit and there have been years when our accounts show
losses.
James Rawle: Broadly
speaking, the senior debt of the project is now repaid. The bank
debt was repaid in 2007 and the European Investment Bank debt
was repaid in 2009. Now, it is an accumulation of cash to pay
off the debenture in 2013.
Jim Clune: As
well as the balance of the Government loan.
Q202 Geraint Davies: To
return to the previous theme about the introduction of certain
technology and your answer that it is not worth introducing this
technology because the shop will be closed in 2017, if you knew
now that you would be given a fresh franchise to run the Severn
crossing beyond 2017, would you introduce that technology now?
Jim Clune: We
would certainly commence to build a business case on that basis.
Q203 Geraint Davies: So,
are you in discussions with the Government about the possibility
of your continuing that? Are you doing that work to build that
business case to say, 'Hold on, the world will not end in 2017;
if we knew what was happening, this is the sort of the thing that
we would want to do.' Although you might not have all of the numbers,
you could ask for a signal.
Jim Clune: We
are not having that kind of discussion with the Secretary of State
for Transport at this time. We are focusing on the fact that,
under the Severn Bridges Act 1992, our concession will end in,
let us say, 2017.
Q204 Geraint Davies: However,
do you not think that, from the point of view of Wales and the
Government, you and the Secretary of State—or the Government—should
be having that discussion? We need the technology to be in place
sooner rather than later for the good of customers and the Welsh
economy.
Jim Clune: That
really is a matter for the Secretary of State for Transport.
Chair: I sense some
recommendations coming up here.
Q205 Geraint Davies: Are
you ready for those discussions? Is it not incumbent upon you
to realise that the world will not end in 2017, that we need new
technology, and that parameters are needed to invest that rationally
from the point of view of your shareholders and debenture holders,
and that you should make the case? Have you not made a case at
all? Do you have a business plan for that eventuality, or are
you waiting for the phone call and then you will not be prepared
for the response?
Jim Clune: If
the Secretary of State required our input on that business case,
we would certainly be ready to provide it. We would obtain the
data.
Q206 Geraint Davies: So,
if the Secretary of State phoned you and asked you to come along
the following week to submit recommendations for technological
investment, if he were to extend the franchise, you would know
what to say, would you? What would you say?
Jim Clune: We
would certainly have access to the expertise that is necessary
to build a business case on new technology.
Q207 Geraint Davies: In
short, if you knew that there was to be an extension, and that
the concession would not come to an end in 2017, you would invest
in technology now. If it were to run 10 years longer, you would
start the ball rolling now rather than leaving the old booths
in place with people taking the money?
Jim Clune: If
there was a possibility of an extra franchise, we would speak
to our shareholder companies and make a decision on building a
business case and assessing the appetite for investment.
Chair: Thank you,
Mr Clune; that is most helpful.
Q208 Owen Smith:
What is the minimum toll that you could charge in order to cover
the maintenance and operation costs of the bridge?
Jim Clune: Given
that the project finance agreements require us to charge the—
Q209 Owen Smith:
I understand that. I am sorry, but you have misunderstood me.
Were you not financing the debt, using your experience to advise
the Government, which will be taking ownership of the bridge in
2017, what is the minimum that it could charge, if it were running
the bridge as a not-for-profit concern, in order to maintain it?
Jim Clune: That
is not a calculation that I have to hand at this point.
Q210 Owen Smith:
Could you give us an estimate?
Jim Clune: We
could make an estimate, but it would need to be after the hearing.
Q211 Chair: You
spend £6 million a year on maintenance.
Jim Clune: Yes,
it is approximately half of the £12 million operating expense
cost in 2010 prices.
Q212 Chair: How
much a day do you normally take in tolls?
Jim Clune: We
take about £6 million plus a month.
Q213 Chair: So,
two months would cover the current maintenance cost of the bridge,
minus whatever the Highways Agency is putting in on top.
Jim Clune: It
does not take account of the ongoing cost associated with financing
the remaining debt.
Q214 Chair: No,
but that will be wiped clear by 2017—that will not be the
Government's problem. The Government's problem will be the £6
million per year that you currently have to spend plus whatever
the Highways Agency is spending on top of that.
Jim Clune: The
total operating cost, including the toll collection infrastructure,
is £12 million a year—it is maintenance and toll collection.
Q215 Owen Smith: How
is that £6 million split between the two bridges? What proportion
is spent on the new bridge and what is spent on the old bridge?
Jim Clune: It
is not a calculation that I have immediately to hand, because
the inspection and maintenance requirements vary between the two
bridges. So, I cannot provide you with that information as we
sit here.
Q216 Chair: Before
I bring in Jonathan, do you have any idea how much the Highways
Agency has to spend in addition to the amount that you are spending
on the maintenance of the bridge?
Jim Clune: I
believe that the figure published for work on the main cables
to this point—the work is ongoing—is in the region
of £18 million.
Q217 Chair: Is
that over a period of three or four years?
Jim Clune: It
started in 2004.
Q218 Chair: So,
the Highways Agency is spending around £3 million a year.
Jim Clune: That
would be the average over that period of time, but the work will
continue. The standard that is now accepted as being the requirement
for looking at this will continue.
Q219 Chair: I
am scribbling on the paper, and I realise that you do not have
the figures, but it looks to me that it is costing about £15
million a year to maintain the bridge.
Jim Clune: Yes,
that is the operating cost together with the contribution from
the Highways Agency, excluding debt finance.
Q220 Chair: Six
million pounds a month comes in in the form of revenue.
Jim Clune: In
2010 prices, yes.
Q221 Chair: That
means that the Government could make a significant cut to the
toll and still have more than enough money to maintain both bridges
at the current required level.
Jim Clune: That
would be a matter for the Secretary of State in the future.
Q222 Jonathan Edwards: Does
the maintenance bill, and the operational costs, include routine
maintenance and also larger maintenance projects?
Jim Clune: It
includes large maintenance projects as well.
Q223 Jonathan Edwards: Do
you have any large maintenance projects planned before the end
of the concession that need to be undertaken?
Jim Clune: Yes,
we do.
Q224 Jonathan Edwards: Can
you give us some detail on that?
Jim Clune: I
can give some examples. We have embarked on a project of repainting
the underside of the second crossing—the main cable-stayed
bridge. That painting project will probably continue until 2015.
We will be carrying out some resurfacing on the second crossing
between now and the end of the concession. Those are the two most
significant projects that immediately come to mind.
Q225 Chair: Thank
you. I will allow one more question, and then we will bring this
part of the meeting to a close.
Geraint Davies: To
sum up, you are basically taking £72 million a year and it
is only costing £15 million a year, so on my calculation
the Government could reduce the tolls to 20% of what they are
now, or something of that order. Assuming that your business comes
to an end in 2017, we are interested in the economic possibilities
of the Government reducing the toll to cover the maintenance costs.
What you are implying in your figures is that we could charge
something in the order of 20 to 30% of the current charge and
cover all of our maintenance costs, which might create a massive
stimulus for the Welsh economy.
Jim Clune: Once
the remaining outstanding debt is cleared, you are just looking
at the ongoing maintenance costs.
Geraint Davies: That
is very helpful.
Q226 Chair: Thank
you, Mr Clune; that is most helpful. We will adjourn for four
minutes or so and return to take evidence from the Minister.
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