Examination of Witnesses (Questions 360-379)|
MR CHARLES GEORGE QC and MISS JOANNA CLAYTON.
BIRCHAM DYSON BELL and MR JOHN McGOLDRICK examined
360. Yesterday we touched on the credit approval
that you recently obtained and which was your justification for
withdrawing the Toll Revision Order. If I understood you correctly,
you were saying that you obtained that credit approval around
December and this applies to the year starting April 2004. Is
It is not quite correct. The credit approval was issued towards
the end of November of last year, but it certainly relates to
the financial year starting on 1st April 2004.
361. You will be familiar with the Prudential Code
of Practice relating to local authorities. Could you briefly
explain what that means in relation to the need for borrowing
consent with effect from April?
My Lord, I am not a lawyer, I am not a legal expert, but section
12 of the Local Government Act 2003 gives a local authority powers
to invest for any purpose relevant to its functions from 1st April
2004. The exercise of that power must comply with a Prudential
Code which indicates that authorities will be free to invest as
long as their capital plans are affordable, prudent and sustainable.
In order that authorities can demonstrate they are complying
with the Prudential Code and its objectives there are a number
of indicators which have to be taken into account. One of those
indicators is affordability. There are others in relation to
prudence and sustainability, value for money, stewardship of assets,
service objectives and practicality, a wide range of obligations
to comply with.
362. Is it not the case, Mr Wilkinson, that the
effect of the Prudential Code of Practice is that with effect
from April this year you do not need Government permission, you
do not need credit approval? The only function of the credit
approval, as I understand it, is that the authority is hoping
to get some sort of grant entitlement on the back of the credit
approval. If it is merely seeking to borrow it does not require
the credit approval. Is that correct?
That is not entirely correct. It demonstrates a slight misunderstanding.
It is not conceivable that Merseytravel could make use of these
powers without the consent of the five district councils of Merseyside,
because one of the tests to be applied is in relation to affordability
and the implications for council tax levels. As I have already
indicated, Merseytravel finances part of its expenditure by a
levy on the five district councils of Merseyside. In my view
the exercise of Prudential borrowing powers certainly for public
transport purposes would need to be specifically approved by the
five district councils. It is, however, possible that we could
use Prudential borrowing now for the Mersey Tunnels. At the time
that Mr McGoldrick is referring to the Act was still in Bill form.
It was not clear. It is even now not entirely clear whether
these powers do apply to Merseytravel or not. I think there is
a possibility that they do, but, as I have indicated, in quite
363. You are saying that it is not entirely clear
whether the Prudential Code of Practice and its lifting of the
need for Government approval to local authority borrowing applies
to Merseytravel, is that correct?
That is a fair summary of what I have said. One of the issues
here is the range of tests that are applied. The legislation
is very clearly written on the assumption that it should apply
to mainstream local authorities. The Promoter of this Bill, Merseyside
Passenger Transport Authority, is not a mainstream local authority,
it is a joint board specifically set up to oversee particular
functions in the conurbation of Merseyside. It does not fit the
standard prescription as envisaged in the Act.
364. It is now the 9th March and this comes in on
1st April and you may well have already considered this issue
when you were drawing up the overall budget for Merseytravel.
Did you not consider this issue in great depth when you recently
considered the budget and presumably you must have by then made
some decision as to whether the Prudential Code applied to Merseytravel
I think we are getting into detailed issues on the financial
management of the affairs of Merseytravel. Certainly the potential
available borrowing consents through the Prudential Code were
factors which were considered, as were the levels of expenditure
we expected to incur during the financial year 2004/05 on a wide
range of projects. As it happens, in submitting our annual update
to our local transport plan we had been granted - I will not say
generous levels of borrowing consent for 2004/05 - sufficient
borrowing consent to make use of that to finance our capital programme.
We had sufficient resources available to us without the need
to resort to using Prudential borrowing even though we were not
sure, and are not even now sure, that it would necessarily apply
directly to the authority, but certainly we looked at that issue.
Mr McGoldrick referred to particular types of borrowing carrying
Government support. What he refers to is the fact that when a
government department issues a credit approval that credit approval
is then automatically taken account of in the revenue support
grants system, the support that is given by the Government to
the local authorities to help meet resulting debt charges and
is a very complicated area.
365. Am I right that this particular credit approval
did not carry any grant backing?
My Lord, the credit approval granted to us was part of the annual
allocation and as far as I am aware was taken account of in the
revenue support grant machinations for the year 2004/05 in relation
to our five district councils.
366. So your credit approval, the one that you have
got for the Tunnels, fed into the district councils greater programme,
is that what you are saying?
(Mr Wilkinson) Effectively, yes.
367. CHAIRMAN: Just before we leave that
one, Mr McGoldrick. Mr Wilkinson, you have said several times,
particularly about the acceleration of debt, that you made the
decision, to quote "I decided". I am assuming that
is after consultation and approval by your board, by the 18 members
of Merseytravel. Is that correct?
That is absolutely correct. I must apologise if I used a term
that implied that the decision was entirely mine. I came to the
conclusion that it would be a prudent step to take. I discussed
the issue with my colleague directors, I discussed the issue with
key members of the authority and then formally reported the outcome
of the issue to the Passenger Transport Authority. The withdrawal,
for example, of the toll increase application and the reasons
for that and that decision was formally approved.
368. CHAIRMAN: Just so that we can be absolutely
clear on this. In a situation like that you presumably make your
recommendations to your board and your board then approves it
or not as they think fit, is that correct?
It is technically correct, my Lord Chairman, although I am granted
a number of powers delegated to me by the authority for the administration
of financial affairs. This was one which I felt was worthy of
discussion with my colleagues, as I indicated, and then with members
of the authority and that was the process which I undertook.
369. As you continue your evidence or under cross-examination
could you make it clear to the Committee on what occasions you
took the decision on your own authority, I am sure quite correctly,
and on what occasions you actually referred to your colleagues?
That would be very helpful. Thank you.
(Mr Wilkinson) Yes.
370. MR McGOLDRICK: Can we move to the next
page, page 94, Exhibit B21(a), which is the financial projections
for the next 25 years or so that Mr Wilkinson has prepared on
the basis that the tolls are not increased either as they could
well be under the existing legislation or as they would be almost
automatically under the new legislation. Can I just go through
a few points. The way I understand this table is that the column
headed "Losses/Profits", which sometimes is losses and
sometimes is a profit, feeds into the next column which is headed
"R&R Fund" which is in effect the balance of your
overall net position. Is that correct?
(Mr Wilkinson) That is correct, my
371. Am I correct in assuming, where there are brackets
round it, it is a surplus?
That again is correct.
372. If we ignore the small amount of 0.5 about
halfway down that column in effect what this table seems to be
saying is that over that 25-year period the accumulated position
is that you do not reach a loss until 2028/29. Is that correct?
That was part of the evidence I gave to the Committee yesterday,
373. Over that period of years the assumption that
must have gone into that is virtually the same as saying you have
broken even after 25 years. Over that 25 years where you have
effectively broken even this table seems to be saying you have
at the same time managed to repay most of your outstanding debt
which falls from £94.6 million to £11.7m. Am I correct?
Yes, it is correct. I did indicate that I regarded that debt
as contractually committed as a first call as it were on toll
income, and that reduction of that debt is reflected in that column
in the exhibit and the consequences in terms of lower debt charges
are also reflected elsewhere in the exhibit.
374. We have the situation where over 25 years with
no toll increase you have basically virtually broken even and
repaid most of your debt; and yet at the same time if we look
at the refurbishment cost column we have what appears to be very
substantial increasing amounts spent each year which I have added
up to £318m spent on refurbishment. Is that correct?
That is correct, my Lord.
375. If we could turn to the next page, page 78,
Exhibit 24A, which basically demonstrates the changes in the tolls
since June 1971 related to the Retail Price Index. The base that
you have taken here is June 1971 when the toll was 15p. That
of course immediately followed upon a 50 per cent increase in
the toll. The month before the toll was actually 10p. Am I correct
in assuming that if in fact you had taken May 1971 as the base
year rather than June 1971 you would then have a very interesting
situation which is particularly easy to understand because the
toll was 10p, and therefore there is not any complicated arithmetic
involved. Basically if you divide the Index by ten you arrive
at what would have been the equivalent toll if May 1971 had been
picked as the base. If we take November 1975 for instance that
would indicate a toll of 18p. In fact, at that point it was increased
to 20p. If we take June 1977 as the example that would indicate
a toll of approximately 23p, and in fact it was increased to 25p
and so on, until you reach September 1986 where you would have
a figure of 48p and a toll determined at that point as being 50p.
That seems to indicate a fairly clear pattern when the tolls
had been revised They have been revised on the basis of the Retail
Price Index but with a slightly earlier base than the one you
have used here. In fact, it goes on beyond September 1986 to
June 1989, the same pattern. The pattern is really only broken
in April 1992 when we had this 67 per cent increase in the toll
from 60p to 100p. If that was taken to December 2003 as you had
at the bottom, you have got 135p as the determined toll and 120p
as the chargeable toll. If in fact May 1971 had been used as
a base am I correct in assuming that would imply that the toll
now based on the Retail Price Index since May 1971 would be around
90p, or have I made a mistake?
My Lord, when I introduced these exhibits I indicated that my
starting point was June 1971, the date of the opening of the first
tube of the Kingsway Tunnels. It is feasible and quite possible
to use a whole variety of alternative start bases. I chose that
one. Mr McGoldrick is correct, if you take the one before you
would end up with a lower toll now. If, however, you took the
toll of July 1934 when the tunnel was first opened, it was set
at that stage at 7.5p. If you inflation-proofed that toll over
the intervening 70 years it would now be £2.62. There are
a whole variety of alternative ways of re-pricing. I chose this
particular method for that reason.
376. Yesterday I think you said you would not have
a 5p increase in toll because it would be fiddly. Is that correct?
That is absolutely correct, my Lord.
377. Could you possibly explain something I do not
quite understand in the Bill at clause 91(9)(b), at page 109.
My Lord, if I am asked for a legal interpretation I am not sure
I am qualified to give it. What I understand from the wording
of this clause is that it was entirely taken from the legislation
in place in relation to the Dartford River Crossing and the Severn
Bridge. Further, my understanding is that the increase in Retail
Prices would have to trigger a rise of at least of 5p to trigger
something just over that. Although the wording would allow a
5p increase, I have already given evidence that in practice we
would not intend to apply that 5p increase simply because of the
difficulties of coin handling at the toll booths.
378. CHAIRMAN: I made a note on my copy of
the Bill before we started the proceedings under (9)(a) of your
interpretation of that sub-clause that if the multiple of 10p
etc etc produced less than a 5p increase, there would be no increase.
In other words, my note was "question mark up or down?"
That is entirely my understanding, my Lord. That is, a justified
determined toll level of less than 5p would not trigger a toll
379. If under (9)(b) it comes to exactly 5p your
interpretation of this sub-clause is that it would be rounded
My interpretation, as an accountant rather than as a lawyer, is