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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 849

House of COMMONS

Oral EVIDENCE

TAKEN BEFORE the

Treasury Committee

Appointment of Paul Deighton
as Commercial Secretary to the Treasury

Tuesday 8 January 2013

LORD Deighton

Evidence heard in Public Questions 1 - 65

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Oral Evidence

Taken before the Treasury Committee

on Tuesday 8 January 2013

Members present:

Mr Andrew Tyrie (Chair)

Andrea Leadsom

John Mann

Pat McFadden

Mr Brooks Newmark

Jesse Norman

John Thurso

________________

Examination of Witnesses

Witness: Lord Deighton, Commercial Secretary to the Treasury, gave evidence.

Q1 Chair: Good morning, Lord Deighton, and welcome.

Lord Deighton: Thank you. Good morning, everybody.

Chair: Happy new year, and congratulations on your appointment-and also, if I may say so, on your last appointment, which was an outstanding success. I do not think anybody disputes that.

Lord Deighton: Thank you.

Chair: The question that, very indirectly, we are going to be looking at, among others, is whether and to what extent you can draw on that experience to bring further success to infrastructure and PFI projects.

Could I begin by asking a very practical question, bearing in mind the track record of a number of your predecessors-that is, people who have been appointed into the Lords to do specific jobs on behalf of Government? This is under the last Administration particularly, as well as this one-particularly the last. How long do you expect to remain in post? Have you given a commitment to the next election, for example?

Lord Deighton: I have not given that particular thought. Any job I have taken on I have always done on the basis of getting the job done properly, so that the-

Q2 Chair: How long do you think it is going to take, on the basis of what you have seen so far, to do this job properly?

Lord Deighton: In my view, jobs like this will typically take a three to five-year period. If the Chancellor were to want me to commit to that kind of period to get it done, and I was making sufficient progress, then I am happy to make that commitment.

Q3 Chair: I would like to ask you a little bit about how you intend to think through the funding for any infrastructure projects. Dealing with the planning issues, in a sense, is more clear cut than working out how to find the money. The Government refused to give direct funding for the Northern line extension to Battersea, but it is now underwriting the private finance supporting it. How much risk transfer to the private sector has there been?

Lord Deighton: I have been in the job just a few days, so my ability to talk about the specifics of risk transfer for an individual project-it would be rash of me to have a strong point of view. Clearly, my priorities in coming into the job are to explore all the aspects of what it is going to take to deliver our big projects with the same Olympic performance as we saw in 2012. That is certainly my level of aspiration, to be able to meet that kind of Olympic performance, which is what we are going to need to compete in the world economy.

There will be four or five things I will need to look at, not just finance. I am kicking off with a capability review, which the Chancellor himself instituted. That is a capability review within Whitehall, so we can understand whether we have the commercial and financial resources and the right people with the right skills in the right positions organised in the right way to deliver the massive programme that needs to get done.

I will then take a careful look at the biggest projects that are already under way. We have a programme that reviews the top 40 projects. It is always best to start with the big ones; I will single out from those 40 the really big ones, the megaprojects, which, in and of themselves, are equivalent to an Olympic Games, and make sure that the structures and delivery around those are satisfactory.

I will then look at the financing, right from how we spend the capital within the macro framework we have, making sure how we spend is effectively done, working right through the other mechanisms, whether those are UK guarantees like the one you refer to for the Northern line extension or the new form of private finance, PF2, which has just been developed, and then looking at how we bring private finance in. There have been a number of initiatives with pension funds, insurance companies and how we utilise the capital markets generally. I will attack that as well.

Fourthly, we have to look at the cost of these projects. The best way to free up capacity and to find more financing is to ensure that the ones we do are delivered at the lowest possible cost. That gives you literally a bigger bang for your buck. Again, work is already underway to determine how we compare internationally, what it is about the scoping and the front end of projects that seems to make us a little bit more expensive, and how we can address some of those issues.

Finally, there are a whole load of issues around planning, which seem to result in some things taking longer than reasonable people would expect them to. I want to get behind how those processes are slowing down-if they are slowing down-our bigger projects, assuming that we are still dealing with the things that the regulations are there to deal with.

My steep learning curve at the beginning-I am going to go up it by going through each of those five categories in a thorough way. Then I will be in a position, hopefully, to be able to give slightly more intelligent answers on specific projects and on whether we really are transferring risk and managing public money properly.

Above all, what the Chancellor really wants me to do is to accelerate the delivery of these projects, to bring an urgency and focus-the things that we had to do with the Olympic Games, because we had an immovable deadline-but to try and create the same sense of urgency and delivery and pride in doing something fantastically, which we had for the Games.

Q4 Chair: The reason I raised a particular project was as an illustration of a large project-it is a very large project-to illustrate how difficult these issues swiftly become. There is not a deadline for the rest of the pipeline of projects, but there is a stronger value-for-money drive, which is inevitable. How much thought and care have you given to the scale of the fiasco over PFI? After all, these questions are very similar.

Lord Deighton: Absolutely. All these things come back to the same thing. I am not a subject matter expert in PFI. Where we are on PFI is pretty clear. There are commonly accepted problems with the original programme, although it did deliver a very significant number of important projects, many of which operate very effectively. But clearly there were questions around value for money and particularly about ongoing costs-flexibility and so on.

Everybody listened to those concerns. The recent announcement of PF2 has been structured to address many of those concerns, whether it is the equity component that the Government is now prepared to invest in, so it is alongside the investors, whether it is the various ways of providing transparency in terms of the return to the projects or the recording of the longer-term liabilities, whether it is the flexibility in how they are put together and so on. The Treasury has tried to address these concerns. I see my job over the next couple of years as making sure that what we have intended to do with those reforms is actually delivered, that these projects represent good value for money, and that it is a useful tool for getting projects delivered that ought to be delivered.

Chair: We recognise that you will not have had a chance yet to get to grips with the detail of all the to-ings and fro-ings of PFI and of specific projects, but I am sure you understand that, since you do not speak in the Commons, we will be wanting to see more of you. I expect that we will be wanting to dig into this detail in future hearings.

Q5 Jesse Norman: Lord Deighton, thank you for coming along. Thinking about your own background, at LOCOG and, before that, at Goldman Sachs, it seems to me that you are more of a manager, energiser and leader than a banker. Would that be a fair description?

Lord Deighton: Well, I am now. I had 20 years. Just to give you some background, in my banking career I had five years at two commercial banks-two and a half years at Bank of America and two and a half years at Security Pacific-where I was a lending banker and a corporate finance advisor, so core banking skills were absolutely fundamental for that.

I then moved to Goldman Sachs, where half my career was on the corporate finance side. My particular focus was on structured finance deals, which are precisely what we are talking about here. I advised big British companies like Rolls-Royce, British Aerospace and Short Brothers on putting together financing packages, in particular, for their aeroplane and engine customers, which are structured in precisely the same sorts of ways as the big project financings we are talking about here. I also did broader corporate finance-mergers and acquisitions and public offerings.

In the second half of my Goldman Sachs career, the business had become so complex that a small group of corporate financiers like me, who had been dealing with clients, were brought over essentially to manage the bank, because the bank had become so big. You are right: in that capacity, I was really managing and controlling the bank’s affairs, and that is how I developed management and leadership skills. I had many people working for me, and it was that background-the people who were looking for someone to run the Olympics-I had both the financial and structuring background and also the leadership background, so it was a hybrid experience.

Q6 Jesse Norman: So, in general, you will be extremely familiar with operating on the capital markets and how they would feed into structured products.

Lord Deighton: Yes.

Q7 Jesse Norman: Great-thank you. How do you think progress on infrastructure is going at the moment, or has been over the last two to five years?

Lord Deighton: It is the question I am asking myself. It is what the review that I laid out for the Chairman is trying to get to the bottom of in an empirical way rather than a judgmental way.

What I really want to understand is how effective the series of very significant initiatives that the Government and the civil service have put in place-some of which run across several Governments-are in helping us deliver these projects strongly, how many of them need refining, how much it is simply a question of time, because these projects have significant gestation periods, and in what areas there is a need for any kind of change, whether it is structure and how we approach them or whether it is in financial programmes that we put together to help make them happen.

Frankly, my incoming assumption is that there is a lot of very good work under way, which I need to understand, and I am probably likely to be building on that, pulling it together, giving it focus and forcing the delivery out of it. There is a lot of good stuff going on-it just needs to be pulled together.

Q8 Jesse Norman: In other words, there is a kind of blockage on delivery, and your goal is to try to relieve that, as it were, and make it work better.

Lord Deighton: That is well put, although it may not be a blockage on delivery; it may simply be that these projects are complex. They have gestation periods, whether it is sorting out the financing or sorting out the planning, and a lot of the efforts that have started off just need a bit of time to get to a result.

I am naturally quite impatient. I am very results oriented; process is important, but only to the extent that it gets you a good result. What the Chancellor wants from me is to give this a real focus and a real sense of getting projects done. People often talk about "shovels in the ground". I want to understand what is really happening and how we can make things happen. This is the prize we cannot forget.

Having a modernised infrastructure is an absolutely critical base for supporting the industries we have here to be world competitive and for attracting other investment in here. It is an absolute sine qua non of our having a successful and productive economy and everything that follows from it. I am delighted about the amount of focus and attention there is. That is now generally accepted in a way that perhaps it was not a few years ago. It never quite had the priority. Everybody now sees that it is important. I am delighted to put my shoulder to the wheel to help get some delivery here.

Q9 Jesse Norman: One of the reasons why LOCOG was such a success is that it turned out to be a very good client. So much project failure comes from bad clients-it is a problem. Can you identify problems already in Government as to how good the client is in terms of not changing its mind and not changing the specification, thinking well about what needs to be done, thinking intelligently about the financing first and not allowing other things to upset a plan once it has been formulated?

Lord Deighton: I think you are absolutely right that being a good client is a critical part of delivering a successful project. I am not at the point yet-I need to do all this work-of having a considered perspective on what we are really doing well and what we are not doing so well. What I do have a very clear perspective on is what I think are the ingredients for being a successful client.

Those are that you have to have, first, a vision about what we are trying to accomplish. For us in the Olympic Games, it was very closely tied in to delivering a legacy as well as putting on a tremendous summer of sport and to understanding the relationship between the inspiration you got in the summer of sport and the other collateral benefits you could derive from it. Everything we did over the seven years was focused on enabling us to realise the delivery of those benefits-every single action. That vision was terribly important. Flowing from that vision you have to have great clarity of objectives.

You then need rigorous control of scope, budget and schedule. It helps, in the case of the Olympic Games, that we had an immovable deadline-27 July 2012 was when the opening ceremony was going to be, and we had to be ready. There are ways of imposing similar disciplines on other projects.

Communications are important. People need to understand what you are trying to do, how you are trying to do it and why you are trying to do it to get the buy-in to support the project itself. In the Olympics, we were very consistent about laying out the drumbeat of our progress.

Also, people and teamwork-you have to get the right people in the right organisations. Good people attract other good people. If you have the right leadership in an organisation you can hire terrific people at every level below them. We can talk as much as you like about structures, but ultimately you need to be able to hire and motivate really good people and get them to work together in a team-oriented way around these projects.

Those are the ingredients that I think are important. I see absolutely no reason why we cannot bring those to bear on big Government projects, too. In many cases, they may already be there. That is what I am going to find out.

Q10 Chair: You have given a period or timeframe that you think is required to do the job, which is three to five years. That straddles the election-it goes well beyond the election. Have you given much thought to how to solve the aviation crisis and the Heathrow problem, which you must have encountered just trying to handle the Olympics?

Lord Deighton: We did. My Olympic experience was very interesting. Clearly, Heathrow was seen as potentially being a big risk for us. Leading up to the Games, there were many issues around queues, which were very embarrassing at the time and, were they to have happened at Games time, would have been devastating to the hospitality and efficiency that we were trying to demonstrate.

We were able to get all the different parties at the airport-the airport operator, the airlines and the border authorities-to work together to come up with the operational solution to make sure things worked at Games time. Many of the improvements they put in place we are now benefiting from, as longer-term legacies. That is my personal experience-looking at the problem, getting people to work together and coming up with a solution that was customer focused.

Chair: I am talking about more airport capacity.

Lord Deighton: Yes, I know-clearly, that is the longer-term issue. When I get feedback from foreign visitors about Games time, they tell me that their experience of Games time at Heathrow was the best experience that they have had at any airport anywhere in the world. I lay that out simply to say that it is possible. Delivering the Olympic Games project should give us confidence that this country and the people we have here are capable of performing at a level of excellence that absolutely has the world standing watching open mouthed. In terms of additional capacity, I accept that it has to be the right objective that we need to determine, for airport capacity, what we need to do to preserve our position as a leading European hub. It is an objective in terms of-

Q11 Chair: We are losing it now, are we not?

Lord Deighton: It is clearly being challenged, so we need to deal with it. It is entirely consistent with my overall goal, which is that we need an economy that can win gold in its competition with the rest of the world. I absolutely accept that. Whether the solution to the problem is adding more runways, building new airports or a combination of that, probably together with some of the operational flexibilities that are currently being trialled, which will give us some short-term help-that is an important thing to mention-it is a big and complicated question, so it is absolutely right that we have someone of the calibre of Howard Davies looking at it. I am sure that he will come up with a sensible-

Q12 Chair: Are you going to be involved in that?

Lord Deighton: I will put him on the list of my top 10 people I need to go and see-Howard is near the top of that.

Chair: So the answer is yes.

Lord Deighton: Yes-but I am not sitting on the commission.

Chair: Brooks has a quick supplementary-then Pat McFadden.

Q13 Mr Newmark: A lot of the responses to the Chairman were more operation management issues, rather than capacity issues, were they not?

Lord Deighton: When you have a short-term problem to solve, you can only increase capacity through operational solutions, not through construction solutions, obviously. You are right.

Mr Newmark: That was the point I was going to make.

Q14 Mr McFadden: I want to follow up on what Jesse Norman asked you about your background a few minutes ago. Up until the Olympics, you were a private sector guy. Your background is in investment banking and so on. You then had this job at LOCOG, where you sat, in a way, between the public and private sectors. You dealt with sponsors and construction companies, but it was a public sector budget and so on. That is a very relevant experience to the infrastructure world.

Can you tell us a bit about this LOCOG experience and what it taught you about the kind of leadership that is needed to deliver projects when you are dealing with both public and private sectors together?

Lord Deighton: It is a fascinating area. Just one comment on what you have said. We raised private finance. While I have to deal with lots of public budgets, too, the LOCOG budget was privately raised from ticket sales, sponsors, merchandise sales and the sale of TV rights.

You are right. The fascinating thing about the platform at LOCOG was that it was the perfect base to create the environment into which both the public and private sectors could work. We were dealing with about 19 different central Government Departments. We were dealing with the Mayor and the GLA. We were dealing with 30-odd London boroughs, which do a lot of delivery around London, as well as various regional agencies through our nations and regions effort. Making sure that the whole of the UK could be part of it was one of the constant things we were trying to accomplish.

Q15 Mr McFadden: What did that teach you? That is what I am trying to drive at.

Lord Deighton: At the end of the day, I became very agnostic in terms of the difference between private and public sector. I found that there were many public sector organisations that had extremely strong people and that were extremely well led, and there were many private sector organisations that were not so strongly led. Therefore, on the assessment that I made and capability that I saw at different organisations and regarding how to get them to co-operate, most of it came back down to their own individual leadership, which was quite independent of whether they were in the public or private sector.

The public/private thing did not seem to matter; what seemed to matter was whether any organisation had the right people at the top who were very clear about what needed to get accomplished, who were very thorough about assuring that they had the resources to do it and who were collaborationoriented in terms of understanding what it took to work in what, in our case, was a massive partnership or consortium and of really understanding that we either all succeeded together or all failed together, and that there were no individual winners and losers.

The leaders who got that were able to bring their own organisation with them very effectively. The public/private thing was rather secondary. They had different processes and different cultures, but their effectiveness in delivering what they needed to deliver was generally a function of the strength of leadership at the top.

Q16 Mr McFadden: You said that LOCOG raised its money privately through sponsorship, TV, ticket sales and so on. One of the bugbears about infrastructure funding-we live in a world of limited public money, and we will do for some time-has been to try to lever in private sector investment.

In particular, I want to ask whether you have had any thought or discussion-I know it is really early days in the job-about the issue of pension fund investment. This is something that the Government is keen on, but the sums that have been committed so far have been minuscule in relation to what the Government would want and perhaps the potential, too. What do you think are the real barriers to getting pension funds to invest more in infrastructure? Why has it not been happening? What could we do to unlock that more?

Lord Deighton: This is a very good example of the general point that I was making to Mr Norman, about trying to work out whether the initiatives under way are right and working, and we just need to give them a bit more time, or whether they actually are not quite right and need a little bit of tweaking.

In the case of pension fund investment, it seems to me that, conceptually, it must be absolutely right that an investor looking for stable, long-term returns adjusted for inflation should find an investment in operating infrastructure to be a wonderfully good match for the form and tenure of their own liabilities. It must be possible to make this work, and that is absolutely why we have set up the pension fund investment platform, so that they can put together their efforts and come up with a way of making this happen.

There is certainly a hunger for these assets. Our job is to create structures that present assets to them in a form consistent with their obligations to their own trustees. For me, the real issue is that they are clearly interested in secure, long-term investments; they are obviously not that interested in taking any of the risks to do with the construction of these projects, whether those are cost overrun risks, technical risks or whatever. We know, effectively, that there is a market there to take out the long-term financing, and we have to look at how we get the projects financed in the short term to turn them into that mature income-producing state that is perfect for a pension fund investment.

Q17 Mr McFadden: Do you see this pension fund thing as a key priority for you?

Lord Deighton: Sorting out financing is one of my top five things. Within financing, working with the pension funds is certainly in the top three.

Q18 Mr McFadden: Looking around the world, are there two or three particular countries that you think do infrastructure best, with the right systems in place and the right mindset? Who do you look to, saying, "We ought to be like them"?

Lord Deighton: That is a very good question, because it was the first one that I asked. The interesting thing is that, when you go to other countries, they look here. We have the deepest and longest history of trying to finance in the private sector things that have generally been done in the public sector, whether that is through privatisation or other means.

One of the visits that I made after the Games was to Berlin, with our ambassador, as there were lots of German industrialists and businessmen who wanted to understand how we delivered the Games. It is actually in the papers this morning: they have had consistent delays with Berlin airport, which is causing all sorts of things and has become a big embarrassment to the city. They were looking to us for how we could help them.

As a relatively amusing aside, they were describing to me the joy of coming to the London Olympics. They did not talk for a moment about the sport; they talked entirely about the transportation experience. For them, as the leader of the German CBI said, it sounded as though we were describing a parking convention, not a sports event. Anyway, it made a strong impact on them.

There are examples of initiatives in places like Australia, Canada and New Zealand where some of the thinking in these areas pushes towards the same kind of innovation as we are looking at. People look to the UK.

Q19 Mr McFadden: My last question to you is really about politics. You will have the warm glow of the Olympics around you for quite some time, and deservedly so. Eventually, people will start asking questions about the delivery of these projects.

The Chairman said at the beginning that there had been a pattern in Governments of different colours of bringing in people from business backgrounds to be Ministers. Do you think you are prepared for the political side of this job? In this building and in the House of Lords, it can get pretty rough, pretty sharp and very partisan. Some businesspeople who have come in have been really good Ministers and have done fantastic jobs. Others have struggled. Are you going to go and talk to them? Do you think you are ready for the political side of it?

Lord Deighton: I have talked to them. One of the first things that I did was to talk to one or two of them, and they all gave me very good advice. I have worked in extraordinarily tough environments. Goldman Sachs is a survival-of-the-fittest kind of place.

I know that the Olympics turned out to be a great success, but we had seven years of dealing with people who were assuming that it would not be. That got me used to dealing with day-in, day-out scrutiny from media and politicians. That was entirely appropriate, but it was day in, day out. Given my transition, with seven years in the Olympic world, which is a sort of hybrid between the private and public sectors, I do not think that it will surprise me. I am ready for it-we will see whether I go with it.

Mr McFadden: Good luck.

Chair: We are all looking forward to seeing more of you.

Q20 John Mann: Following on from Mr McFadden’s question, I am surprised that you are suggesting that the rest of the world is looking to Britain for how to deliver new towns, new airport expansions and new high-speed rail. We have nothing to learn from them on how to deliver those three examples, then?

Lord Deighton: No-we have. I may have misunderstood. The question that I was trying to answer was around introducing innovative financing techniques, using the private sector. That is what I was answering.

Q21 John Mann: That is one aspect. You have made very clear your priority in terms of innovative finance. Let us look at other aspects of infrastructure. How many projects will your appointment lead to commencing before May 2015?

Lord Deighton: That is one measure. The answer at this point is that I do not know-that is the work that I need to do to determine where we are on the pipeline.

Q22 John Mann: But what is your target?

Lord Deighton: It is too early for me to have a target. I have been in the job a day. I need to work through those things. We have a national infrastructure plan, which has a pipeline with just over £300 billion of projects. That comprises about 550 separate projects. As I have pointed out already, we have identified the 40 top projects that we think are important for modernising our economy and focusing our resources on. I will start with that set of projects. I am as interested in delivering ones that were started by the previous Government as I am in starting new ones. It is the cumulative effect that, in delivering a transport system-

Q23 John Mann: Those are 40 that have not begun yet.

Lord Deighton: In terms of shovels in the ground, no.

Q24 John Mann: How many of those 40 will begin before May 2015?

Lord Deighton: That is why I need to do the work-to figure that out. I do not know the answer to that yet.

Q25 John Mann: What are the Government’s targets?

Lord Deighton: I don’t know. These are the questions that I need to do my own work on to get a good sense of what we need to do, where we are now and what is realistically possible.

Q26 John Mann: If the world is looking towards us, what do you think is a realistic target to be considered, out of those 40, to have begun by May 2015?

Lord Deighton: It would be bizarre of me to make that speculation before I have reviewed them all. You would think I was crazy to do that.

Q27 John Mann: With the Olympics-I sat on every single Olympic Bill Committee-Parliament passed legislation that allowed all the normal planning considerations to be a combination of bypassed and short-circuited. Do you think that is a key priority for you to achieve in changing Government policy?

Lord Deighton: Not in those terms. In the case of the Olympics, where we had one big site, which was effectively being regenerated as a whole, it was appropriate to take the powers that were taken to deliver that site in a fast and effective way. I think that the result demonstrates that that worked.

I do not think that would necessarily work in every other kind of project. That is why, when I went through the list of things I needed to do in my first answer to the Chairman, I said looking at planning. It is horses for courses. Building a nuclear power station is very different from expanding a motorway. These are incredibly different projects. There is no one size fits all. You have to look at them. That is why they are the big projects. Some of them the size of the Olympics need to be looked at individually, and they will have individual solutions.

Q28 John Mann: The difference with the Olympics is that all the planning restrictions were short-cut. That was a judgment made. I voted for it-it was unanimous. If you happened to own or rent a piece of land on the Olympic park, your rights were significantly lower than if you did so, let us say, on the proposed path of a high-speed railway. If you lived adjoining, your rights were significantly less than if you wanted to object to an airport expansion.

Many people suggest that planning itself is the biggest single impediment in this country, and the regional development agencies made that point repeatedly to the last Government. Is it part of your role to kick Government into shape in reducing the delays built in by the planning process to major infrastructure?

Lord Deighton: It is my job to reduce unnecessary, inappropriate delays. That is why one of my streams of work will be looking at the planning process, to see where it is working as it should do and where there is too much bureaucracy and too much red tape, with people not making decisions as quickly as they could do, given that the evidence is all there and there is no reason to stop it moving ahead.

I am not suggesting or coming in with a perspective of sweeping things out of the way; I am coming in with a scalpel and saying, "Let’s have a look at these projects. Let’s understand what it is that is stopping them. Let’s apply Government leverage to removing those barriers. It is appropriate to do so."

Q29 John Mann: To build a bridge over the A1 in my constituency will take at least five and a half years, from the Government announcement of funding to the bridge being completed. That is one small bridge on the A1. In your view, is the balance wrong between the rights of people to object to major infrastructure developments and the requirements of the country in setting priorities to push through those infrastructure developments?

Lord Deighton: That is well put. It is my job to challenge that balance and to push to determine whether we can shorten those periods, still allowing for the appropriate challenge-but does it need to take so long?

Q30 John Mann: One of the real problems in changing legislation in this area is that the biggest opportunists in this are us, the Members of Parliament, who sometimes tend to become NIMBYs-not all of us in all situations, of course, Chairman. If it is a big airport expansion, let us say with a new runway, we tend to support it for the country, but we then get iffy if it is at our local airport. If it is a railway expansion, we tend to want to defend the rights of the householders whose houses are going to be demolished or who are going to have a different back garden view, rather than the requirements of the country.

How are you going to deal with that problem, when politicians, including very senior politicians, seem to have a lot to say about major infrastructure developments such as High Speed 2, Heathrow airport and other ones that may well emerge?

Lord Deighton: Particularly when they are in their back yard, absolutely. That is a very significant challenge. What I would draw on from my Olympic experience is that everything that we did was based on cross-party support, as everybody wanted the Games to be a success, although there may have been some differences from time to time about what it would take to make them a success. The same applies to modernising our infrastructure. I think we can generate cross-party support, as we have for High Speed 2. It is supported by the major parties.

Communications have a lot to do with this. I do not think that the cases for these big projects-why we are doing them and how the alternatives have been evaluated-always get the hearing they deserve. We are always very much looking at why we can’t do it here or can’t do it there. We need to make a stronger case about why it makes sense for the country and why we have made the choice that we have, to bring everybody along.

Q31 John Mann: Is one of the lessons from the Olympics that we require enabling legislation to allow major infrastructure projects in this country to be done in a realistic timescale to meet the country’s needs?

Lord Deighton: That is a lesson-for certain projects, that is extraordinarily helpful and necessary, yes.

Q32 Andrea Leadsom: Good morning, Lord Deighton.

Lord Deighton: Good morning.

Andrea Leadsom: I have to confess to having HS2 running through my constituency, so I have taken a big interest in it. I also spent some years in project finance myself. I have always said to anyone who is interested in not just automatically accusing me of being a NIMBY that what is very important is the project itself.

I would like to ask you a bit about your own view on what it takes to make a successful project. You mentioned in response to Mr Norman a few of the things that you think make success in an infrastructure project. Could you talk about some of the risks that you see, either specifically with regard to actual projects on the list of 40 or generally speaking? What sort of risks do you highlight, coming into this job, as the kinds of things you will be looking out for?

Lord Deighton: I think that a lot of the problems around projects often stem from a lack of clarity about what we are actually trying to do, who we are asking to do it and the resources attached to delivering the project. For me, and I know that this sounds terribly simplistic, I have always found that getting to the bottom of what we are really trying to accomplish, having detailed plans that underpin it, holding individuals to account for delivering certain things and everybody being very clear about who is doing what, about exactly what is done and by when provides extraordinary focus if you can really drive that through an organisation day in, day out.

Q33 Andrea Leadsom: That is very interesting, but is there also, in your position uniquely, a duty on you to make sure that the project that is on that list of 40 is a sensible project?

Lord Deighton: Absolutely. If I take a step back to my core objective, it is that this country has the infrastructure that enables it to be a global winner. If you work back from that overriding objective, that means that we have to build the right projects in the right way-absolutely.

Q34 Andrea Leadsom: For example, if you felt that one of the list of 40 was not the right project, what process would you undertake to have it reconsidered, or do you not see that as being your job-you are merely there to implement?

Lord Deighton: That is an interesting question, and I am still quite getting to the bottom of it myself. There is an enormous impetus to get projects that are approved, partly under way or delivered. We want to modernise our infrastructure. We want to enjoy the benefits of the jobs that come with getting the shovels in the ground. For me, identifying those projects-let us call them completely and utterly uncontroversial, if there is any such thing-and getting on with them and delivering them, they fall into one bucket.

There are other projects, which-let us make this easier-we are in the process of considering, and I will want to help make sure that they are the right projects in the right way. What you are really describing are the ones that are a little bit in the middle, which have been approved but which are controversial, and where extra evidence may demonstrate that it is perhaps not the right project to do. Those are all things that I would expect to have to develop a view on.

Q35 Andrea Leadsom: On that specifically, as Mr Mann mentioned, and on a third runway at Heathrow, for example, what I am trying to get at is: to what extent would you consider your role to include that of being arbiter between whether this does or does not stack up, bearing in mind the range of options available?

Lord Deighton: I do not consider that to be my major role. My major role is to get our infrastructure delivered. You cannot isolate these questions. These are nuanced issues, and I will have to be dealing with that as well. My major priority, I think, is on taking the projects that we know we want to get done and delivering them. We need to get on with it.

Q36 Andrea Leadsom: Turning specifically to High Speed 2, as I said earlier, my concern about it is that the project is simply not good value for money. I would like to know what your approach is to a continually deteriorating business case, which started off with a cost-benefit ratio of very acceptable levels that consistently deteriorated to a point where it falls below the DfT’s own borderline for a cost-effective project-in addition, where the major projects authority has put a red-amber warning on it. How will you deal, specifically, with the very legitimate questions and the judicial reviews and so on, which are being brought forth by people who say, "This just isn’t good value for taxpayers’ money"?

Lord Deighton: I will do what I always do in these circumstances: I will get to grips with the facts first, so I really need to do my research. Other than in broad concept, I am not getting into the detail of the cost-benefit analysis, and HS2 is not something that I have had the chance to look at yet, but I will get into the facts and form my judgment from there.

Q37 Chair: That means that you have an open mind-sorry, Andrea-on whether this project is in fact value for money.

Lord Deighton: I am in favour of high-speed rail. I think the connectivity that it brings between south and north is absolutely the right thing.

Q38 Chair: But that is in principle. We are now looking at the numbers.

Lord Deighton: In every project, you really need to look at the scope and the delivery to ensure-

Q39 Chair: I am sorry to ask the same question again, but have you got an open mind on whether this project is going to succeed in delivering value for money?

Lord Deighton: I have an open mind on every single one of the 40 projects; I do not have a closed mind to anything at the moment.

Q40 Chair: You think that, were it to turn out that it did not, you would suggest to the Government that they review the decision?

Lord Deighton: If any project does not represent good value for money, the Government is going to review it. Any project.

Q41 Andrea Leadsom: In answer to other colleagues on value for taxpayers’ money, you have talked about the best bang for your buck as being a priority for you. What you will find, as Mr Mann has said, is that there will be very controversial projects where lots of people do not want them, but the Government is determined to go ahead anyway. There is that balance between "This is rubbish" from a taxpayer’s value-for-money perspective versus "This is what the Government wants", and it is part-way completed. What I am trying to get a feel for is your approach to that absolute dilemma. How will you deal with that? Will you go for value for money or will you say, "What the hell-I am just here to implement"?

Lord Deighton: My approach to everything, which I have always had, is to start off with the facts and to be as objective as I possibly can be.

Q42 Andrea Leadsom: But is your priority value for taxpayers’ money or is your priority to implement successful projects?

Lord Deighton: I do not think the two are mutually exclusive. You have to consider both. Successful projects, by definition, will give you good value for money.

Q43 Andrea Leadsom: Not necessarily. A successful project could be, for example, the Channel tunnel. It was underwritten several times and went back to further rights issues and so on. People lost their shirts over the Channel tunnel. However, it is still now deemed to be a successful project. The same is true with HS1; passenger numbers only ever reached a third of what they were forecast to reach, but it is seen as a successful project. In terms of value for money, they were both absolutely appalling, but they are seen as successful projects.

I am still trying to get an answer from you. Is value for taxpayers’ money more important than delivering a project that is deemed to be a visionary, curing the north-south divide thing? How much does value for money matter in the mix?

Lord Deighton: Value for money is an extraordinarily important criterion. It has to be, given the limited resources that we have. You have to incorporate within value for money the longer-term benefits, which should be reducible to the value-for-money consideration, it seems to me.

Q44 Andrea Leadsom: Is 40 key projects too many?

Lord Deighton: Implicitly, I agree with the sense of your question, which is, "It’s a large number, isn’t it?" It reflects the scale of our ambition and what we have to do. My general approach, when I am looking at a number like 40, will be to divide it up into chunks. There will be a road chunk, then there will be £10 billion-plus projects that really need a structure around them. One of the things that I would do within the 40 would be to try and chop it up into categories that make it a more manageable and communicable list.

Q45 Chair: You said a moment ago that you would start off with the facts and be as objective as possible. I hope you take this in the way that is intended, but I do not think that anybody would suggest that you want to start off without the facts and then be as subjective as possible.

Lord Deighton: Quite.

Chair: So, you have not told us a great deal there. What we are hoping for-and we quite understand if you will not be able to deliver that now-as you get better acquainted with the detail of these projects, is some more detail.

Lord Deighton: Of course. I would look to my record. One of the reasons why the Olympic Games were a success was that we kept on going back to the facts and to delivering what we said we would do in a consistent way. It is how I operate. I think you are being a bit unfair when you say that. I do not think that everybody necessarily starts off with the facts and forms opinions based on the facts. That is slightly more unusual than you are probably suggesting.

Q46 Chair: That is totally what we are asking you to do with HS2.

Lord Deighton: And every project.

Q47 Andrea Leadsom: I want to come back on that. The key difference with the Olympics and any other project is that, with the Olympics, there was only the one site-that was what was bid for and that was what was agreed. You had to deliver something that was a given. With every single other project-you could build a new airport in the Thames valley, you could do any number of things-there are lots of choices. What we are trying to understand is how you will come to conclusions on choices and how you will evaluate those. It is not the same as the Olympics. It would be a mistake to draw too many parallels.

Lord Deighton: There are some lessons from the Olympics that are quite helpful and some that are entirely irrelevant. You are right about when you are dealing with a portfolio of projects. My job, though, is focused on the delivery of projects and making sure that Government can deliver projects well. All the issues that go into choosing where individual Departments are spending their money is a much broader issue, where I will have a relatively small part.

Q48 John Thurso: I want to ask you some more about financing, but first I return to a question that has been asked by the Chairman a bit and by Pat McFadden a bit. What specific preparation have you made for your new role as a professional politician?

Lord Deighton: Specific preparation? I have spent seven years preparing the Olympic Games, which has required me to work extensively with the political process-with Government Departments and with political scrutiny.

I have been in front of the Public Accounts Committee, the Culture, Media and Sport Committee and the Greater London Assembly. I have been dealing with matters of public finance. I have been very involved with the overall budgets for the Games, which has meant dealing with the Treasury, DCMS, the Home Office and the Department for Transport.

During my Olympic time, I spent, frankly, as much time in this world-probably more time in this world-than I spent in the private world. Prior to that, when I was in the private sector, I was responsible for regulatory relationships, so I spent a lot of time with the FSA and the Bank of England.

Q49 John Thurso: Is it your answer that you actually have not done any particular preparation for the particular role as a Minister, standing at the Dispatch Box, dealing with all these aspects?

Lord Deighton: I took the time between the Games finishing, when I still had quite a lot of contractual closure to manage and the winding-up of the business, to make sure that I had accomplished my introduction to the House of Lords, so I have had a chance to spend some time there to see how it operates. The idea was to use that slightly slower period to prepare myself for how the Lords operates-yes.

Q50 John Thurso: We have not much time, so let me cut to what I am trying to discover. The House of Lords is littered with the bleached bones of goats that have floundered in the political process. Most of them have not succeeded; there is the odd notable exception, but most of them have come in with a huge, good track record in industry or the public sector or whatever and when they have arrived in actual professional politics, they have found it impossible to apply the same disciplines and methodology. I am wondering whether you have had regard to that, have looked at that and have thought of how you might deal with what seems to be a fairly inevitable consequence.

Lord Deighton: Without overdoing it, my day-to-day life in running the Olympic Games was a political experience. It was dealing with the Home Office on security, it was dealing with the DfT on roads and it was dealing with Transport for London. I have been in this world for seven years. The reason why the Chancellor asked me to do the job was clearly that the Games were successful, but also, for seven years, I have been in and out of Whitehall. He talked to many people who have been dealing with me and, presumably, got a reasonably positive result-that I would be able to do this.

Q51 John Thurso: I want to try one last time on this before I move on. There is an immense difference between dealing with the political process and politicians, which is where you have been in the past, and actually being a politician and the process, which is what you are now. My sense is that you have not grasped that yet.

Lord Deighton: Until you are actually in a job, it is quite difficult to grasp it. The simple point that I was making-I hope you agree with it-is that it is a much bigger step to move directly from the private sector into politics than it is to move from the private sector to politics having spent seven years working on a project that required massive interaction with the public sector. That is really the only point that I was making. Beyond that, I agree with you.

Q52 John Thurso: I take that point. My concern is that, having done a stellar job with the Olympics, as everybody accepts, and having pulled together an area that could have been a public sector disaster into the outstanding success of this country for some time-certainly last year-there is a very high expectation of you that you can repeat that.

I listened to the answers that you gave, for example to John Mann-that you will be looking for unusual and unnecessary delays. Your unusual and unnecessary delay is my civil liberty. To Andrea, you said, "I will look at the facts," but politics is not about facts; it is about public feeling and sentiment as much as it is about facts.

Therefore, when finding the right answer for the political answer, it is partly about the facts and partly about the sentiment. My concern is that you will come in as the great white knight to deliver infrastructure, which is hugely important, and we are investing in you magical powers, which, you will find, do not exist when you are standing at the Dispatch Box. It is your thoughts and preparation about that which I am really after.

Lord Deighton: That is quite politely couched advice, which I absolutely appreciate. I should tell you that the Olympic Games is not just about facts. It is hugely about sentiment and managing public sentiment and other people’s enthusiasm, so I do have some understanding about how you link facts with popular opinion. It would have been extremely easy for me to say, "No thank you, Chancellor. Things don’t get any better than this, and I am just going to retire and sit on a few boards and enjoy the glow of the Olympic success of which I was a part." The Chancellor said, "We’ve got some really important work to do. I think you can help." I would like to be able to help. If I am nothing else, I am a realist.

Q53 John Thurso: Excellent. Let me move on to the economic impact. You said something I completely agree with-that a good, modern infrastructure is essential for growth. How much growth do you think you can look for from the infrastructure plans that have been put forward? What should be the measures of success in the economy, generally, from the action that you will be taking? When we look back at this in three, four or five years’ time, how will we measure whether what you have been leading on infrastructure has hit a target, been under target or exceeded target?

Lord Deighton: Infrastructure investment falls into what I think of as supply-side reforms or the micro-economic side of the economy, which, done well, should improve the underlying productivity of the economy.

It is far too early for me to be able to equate the specific work that is going on directly. Directionally, it clearly takes us towards the right place. Whether we will really have the ability to tie specific investments to specific productivity outcome-there are too many other things going on in the economy to measure them-but if we get these right, it has to be directionally powerful for the UK economy.

Q54 John Thurso: You have rightly said that achieving value for money in the construction of infrastructure-or the delivery of it, as not all infrastructure necessarily has to be constructed-in other words the cost, is an important element. The return is an equally important element. Some things will deliver a greater return than other things. How will you prioritise those? How will you measure what is best for growth, given that we have a restriction on the finance available? How are we to pick the best projects that will deliver the best growth for the economy and not just randomly splatter things around?

Lord Deighton: One of the things that also feeds into that equation is the extent to which we are successful at introducing private capital into this entire landscape. If you look at the £300 billion-plus of projects on the table, certainly north of two thirds of those are going to have to be financed in the private sector. By definition, those will have to have a rate of return and a value for money that satisfies external requirements. The majority of what we will be doing will have to pass the test of the market, rather than our making our own assessment of whether we allocate public capital to it.

Q55 John Thurso: It comes back to the point that Andrea was making-that there are projects that, in pure capital market terms, could be considered as pretty much a failure, like the Channel Tunnel and so on, but which, for the economic benefit of the country, have proved hugely beneficial. There are projects that are necessary for general economic prosperity.

If you build a dual carriageway, there is quite a body of academic work that shows that, even if you build it to somewhere that does not need it, the fact that you have built it will generate economic activity. If you build a pier in a port, for example, you may not be able to substantiate it today, but it will be used. People will deliver things there. That is good if you are looking at economic growth, but you might not be able ever to justify it purely as a project on a return. How will you be looking not only at the straight market view of return on equity but also at the return to the economy through growth, which is a very critical part of the process?

Lord Deighton: This really comes back to looking at our infrastructure in terms of systems. We are talking about a transport system, an energy system, a communications system, environmental systems and a scientific research system. In order to be able to answer properly the very valid questions that you are asking, we as a country need to have a clear strategic view of how those systems need to look and how they interact with each other. Then you have a framework within which you can decide, alongside the economic returns, how to rank the projects, which is effectively the question that you are asking.

John Thurso: Thank you-and I do wish you luck.

Lord Deighton: Thank you.

Q56 Mr Newmark: There is a broader question that I wish to ask, which I did not think about at the beginning. I was in private equity before. You have quite a challenge in drilling down through 40 projects. I tend to think that people in my business are pretty smart and are incentivised in the right way and everything else. People in the public sector are smart people, but they are not necessarily incentivised in the same way and they do not tend to think in the same way. Are you worried about the human capital issue in terms of having the capacity of people around you to drill down to do the right due diligence and to really look at these 40 projects?

Lord Deighton: Yes.

Q57 Mr Newmark: How do you propose supplementing that, then?

Lord Deighton: The short answer is yes; it is a very good question. That is why item 1 on my to-do list, as I laid out to the Chairman, is to go through a capability review around Whitehall, particularly in those Departments that are at the core of infrastructure delivery-the Department for Transport, DECC, DCMS for digital and the Department for Environment, Food and Rural Affairs for the sewers and waste.

That is why we have said that we will strengthen the mandate of Infrastructure UK in order to be able to support Departments in their delivery of these projects. That means making sure that we have the right numbers of people. We may just not have enough people. This is really getting to the heart of your point. It is whether we have the people with the right skills. If we are going to get people with the right skills, that inevitably raises questions about whether we hire them full time into the civil service or whether we bring in consultants. It raises questions about compensation levels, which have many issues attached to them. All of which we will need to get to grips with if we are going to up capability to be able to handle these projects in the way you are suggesting.

I agree. It is number 1 on my list. If you do not have that right, everything else is at risk of crumbling.

Q58 Mr Newmark: One of the political challenges you are going to face is that, whereas in the private sector we are prepared to pay up because we realise that, in the long run, the payback is good to get good people in or to bring in consultants, I suspect that taxpayers, if they see some of the consulting fees that may come through, may not understand that. You may have a real communication issue to explain to people why it is they are paying these sums of money to be able to supplement public sector workers who work with you in the Treasury who may not be up to scratch. We saw huge failures in PFI 1, with poor negotiation, a poor understanding of return on capital issues and everything else.

That brings me to the broader question. Jesse and I have spent a long time looking at PFI over the past six or seven years. PFI in itself has become a toxic word. People do not understand it. In terms of looking at version 2 of PFI, which is to bring about the lower borrowing figures and the lower cost to the taxpayer, which is ultimately what it is about, as well as delivering the end product, do you think that the changes that the Government are proposing will do anything to address this problem-for PFI version 2, effectively?

Lord Deighton: First, I want to take you up and provide a little bit of colour on your comments about failure, historically, on some of these projects and people’s capabilities. My general observation is that the people in the trenches doing the work are smart people doing good work with the right intentions. It goes back a little bit to Mr McFadden’s point. We can do an awful lot at the leadership level in just shaping how these people are supported and the way we define what we expect of them that will help them be more successful. Leadership plays a very big role; it is not simply a question of upgrading the capabilities of the middle manager. I just wanted to make that point-so thank you for that.

Do I think that PF2 answers the problems of PFI? I am persuaded through the arguments that I have heard-that is exactly what it was designed to do. We have to see in practice whether it does. One of my observations about PFI is that it is important but, in the financial year 2011-12, very few projects were done through PFI. Historically, it has been more what I would describe as social, rather than economic infrastructure-more schools and hospital-type things. My primary focus will be more on what you would call economic infrastructure. While I am very focused on ensuring that PF2 works well, I do not know-

Q59 Mr Newmark: Both of them will entail value for money and lowering the costs of capital.

Lord Deighton: Yes-the same issues.

Mr Newmark: So, taxpayers will get value for money this time-

Lord Deighton: Exactly.

Mr Newmark: And, on the whole, I do not think they particularly did with PFI.

Lord Deighton: Which has to be the question that implementation has to resolve.

Q60 Mr Newmark: That begs the next question. The Government stated that PF2 will be less expensive but, in previous evidence hearings, we have heard that it may not be. What are your thoughts on that?

Lord Deighton: I have no thoughts on that at the moment, but I am looking forward to looking into it.

Q61 Mr Newmark: Okay. There was some work that was done that you should look at, which looked at the weighted average cost of capital and the overall cost being, let us say, 8%, but Government costs being 2%. Spending a bit of time on that might be helpful.

My concern, once again, is value for money for taxpayers-what are the costs going to be? Looking at the overall, average cost of capital, this brings in my final point-I appreciate that the Chairman is eyeing me-which is the concept of equity involvement. Will public sector equity involvement in PF2 actually lower the net costs to the public sector?

Lord Deighton: From my perspective, the principal objective or the reason for having the Government involved as an equity investor is to give that sense of ongoing involvement and the returns from the project, and-

Q62 Mr Newmark: So it is a form of insurance, is it?

Lord Deighton: I would not put it that way.

Mr Newmark: It sounds to me like that.

Lord Deighton: No, no-but I think-

Mr Newmark: So, basically, you do not give away too much, so there is some benefit-

Lord Deighton: No-so that there is an ongoing and continuing interest in the project and an interest in seeing the returns from the project and management of the project. It is all the reasons why you would approach things from a partnership point of view.

Q63 Mr Newmark: Again, in private equity, you would align the interests between us, as the investors, with management. Do you see the same sort of outcomes between aligning the interests of, effectively, Government with those that are implementing the PFI projects in the same way?

Lord Deighton: It does help to align interests if you keep a stake in the ownership. It is one way of doing it.

Q64 Mr Newmark: My final question is on having people on boards. On the approach whereby the Government have representatives sitting on project boards, do you think that these people-going back to my first question-have the skill sets to bring value added on those boards?

Lord Deighton: You know what the answer needs to be.

Mr Newmark: Yes-I know what the answer needs to be.

Lord Deighton: Of course they do. One of the things we need to ensure is that that is, in fact, what happens.

Q65 Mr Newmark: Do you see yourself perhaps bringing in outsiders on to those boards-not necessarily pulling in people just from internal resources, but perhaps bringing in some smart outsiders to sit on those boards to represent the Government’s interests, effectively?

Lord Deighton: That is one way of doing it, yes.

Chair: That is very helpful. Thank you very much for coming to give evidence. You have heard, just in those exchanges, how much scepticism there is about PFI.

Lord Deighton: Yes-I certainly heard that.

Chair: Our deep concern, as a Committee, is that we may find ourselves reinventing something that so demonstrably developed, in places, into a shocker, over the last decade, of the largest proportions.

Obviously, we will be looking to have more detailed exchanges in future, and we quite recognise at this stage that you are just finding your feet in your new post-and welcome to that post. We wish you every success.

Lord Deighton: Thank you all very much.

Prepared 14th January 2013