Select Committee on Mersey Tunnels Bills Minutes of Evidence

Examination of Witnesses (Questions 360-379)



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 that correct?

(Mr Wilkinson) 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?

(Mr Wilkinson) 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?

(Mr Wilkinson) 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 limited circumstances.

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?

(Mr Wilkinson) 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 or not?

(Mr Wilkinson) 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?

(Mr Wilkinson) 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?

(Mr Wilkinson) 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?

(Mr Wilkinson) 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 Lord.

371. Am I correct in assuming, where there are brackets round it, it is a surplus?

(Mr Wilkinson) 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?

(Mr Wilkinson) That was part of the evidence I gave to the Committee yesterday, my Lord.

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?

(Mr Wilkinson) 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?

(Mr Wilkinson) 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?

(Mr Wilkinson) 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?

(Mr Wilkinson) 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.

(Mr Wilkinson) 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?"

(Mr Wilkinson) That is entirely my understanding, my Lord. That is, a justified determined toll level of less than 5p would not trigger a toll rise.

379. If under (9)(b) it comes to exactly 5p your interpretation of this sub-clause is that it would be rounded up?

(Mr Wilkinson) My interpretation, as an accountant rather than as a lawyer, is exactly that.

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