Examination of Witnesses (Questions 20-39)
MONDAY 9 APRIL 2001
SIR RICHARD MOTTRAM, KCB, MR ROBERT HOLDEN, MR STEVEN MARSHALL, and MS LOUISE HART
20. I see. On page 3 it says: "As a private sector company reliant on its trading income from the Link, LCR cannot guarantee to be able to raise the necessary finance for Section 2 when it is required." That could lead to a serious situation, could it not? We could end up with half a railway?
(Sir Richard Mottram) Given the scale of this project, Chairman, it has always been recognised that it would require Government support if it were to succeed because it has got a very high capital cost at the beginning and you pay back over a very long period of time. We are satisfied that we, together with LCR and others, can ensure that the Link is built.
21. In paragraph 10 it says that the Government having issued various guarantees and undertakings to lend money to LCR means that the taxpayer is exposed to considerable financial risk if Eurostar UK does not perform as well as expected against revised forecasts. That is very worrying and seems to conflict with your broad assurance that you wanted to give us a few minutes ago about the safety as far as the taxpayer is concerned.
(Sir Richard Mottram) I do not think so, Chairman. The point that I was trying to bring out, but perhaps I did not make it clear, is that, as the report establishes, there is an exposure for the Government in relation to the access charges, which we have recognised, and this will arise probably in the next decade and we are focused on what that might mean. There are equally, under the restructured deal, considerable prospects of money coming back into the Government in the longer term.
22. If we turn to page 26, the second column, the heading of that column is "Large amounts of public money will be lent directly to LCR if Eurostar UK continues to underperform".
(Sir Richard Mottram) Yes, that is what I was referring to here.
23. Which does not quite fit in with the impression given a while ago. It says in the first paragraph that financial restructuring agreed to in 1998 was based on two benchmarks, a "Central Case", which I gather is the optimistic one
(Sir Richard Mottram) Yes.
24.And the second benchmark which is known as the "Downside Case", which is the case which you and we will probably be more familiar with in view of the record so far. If we go down to the bottom of that page it then says: ". . . failure to achieve the Downside Case over a period of time could lead to substantial direct lending to LCR, or the reversion of Eurostar UK to public ownership." Again substantial public lending by the Government. Then it emphasises that this is not a theoretical risk. It is not a theoretical risk, it is a very real risk. Do you accept that?
(Sir Richard Mottram) I do.
25. You agree that. ". . . a revised forecast of Eurostar UK's performance, commissioned by the Department in April 2000, indicated that direct lending to LCR was likely to amount to at least £370 million and could, in extreme circumstances, reach £1.2 billion." That sounds substantial, I think, to most members of this Committee.
(Sir Richard Mottram) It sounds substantial to me as well, Chairman.
26. It is worrying as well, is it not, because having been told it is not an unreal risk, we are then told in the final sentence that: "Eurostar UK's performance has been disappointing. Operational losses in 1999 and 2000 were broadly in line with the losses forecast by the Government's Downside Case", the very pessimistic case, the one that could lead to large sums of public money being called on.
(Sir Richard Mottram) The one that would lead to, roughly speaking, £340 million, Chairman, so what we are saying is that if the performance is substantially below our latest forecasts then higher numbers could arise. If it was around our latest forecasts then the additional support in the period before LCR becomes substantially cash positive and starts paying the Government could be around £350 million.
27. What about the cost of the guarantees if it does not prove successful? We know that the direct grant situation has not changed materially. It is basically the same figure as originally, an updated version of £1.73 billion, and on current terms that would be £2 billion. What about the guarantees that the Government has had to give? What could these costs be if called in?
(Sir Richard Mottram) We do not expect that these guarantees will be called in.
28. Why not?
(Sir Richard Mottram) Because we have modelled the likely outcomes and even on the more pessimistic outcomes than the one that we now believe to be realistic we still do not envisage these guarantees to be called in.
29. Even on the Downside Case?
(Sir Richard Mottram) No.
30. How much would you expect then?
(Sir Richard Mottram) Because we would essentially lend LCR more money under the loan facility and then get them to pay it back later.
31. How if it has not become successful?
(Sir Richard Mottram) Because over time the traffic will grow, Chairman. It is an argument about the rate at which it grows. Our current assessment is that these guarantees for the bonds will not be called in and what we are talking about is the risk that we were just focusing on a minute or two ago that we would have to provide a loan in the next decade.
32. A loan is a loan as long as the person receiving it is in a position to pay it back. There is nothing in the performance of Eurostar so far to lead to the slightest belief that they are ever going to be able to pay it back.
(Sir Richard Mottram) That would not be my view.
33. I know it would not but statistically why not?
(Sir Richard Mottram) Because the models that we are now using are, we believe, realistic about the likely growth in passengers on Eurostar and the likely growth in revenue on Eurostar, and under those circumstances we do not expect the bond to be called and even if they were more pessimistic than our current forecasts we still do not expect the bond would be called.
Mr Williams: Thank you. Mr Nigel Griffiths?
34. You said in response to the Chairman on paragraph 23, page 7, that you disagreed with the National Audit Office's analysis.
(Sir Richard Mottram) Yes.
35. What precisely do you disagree with?
(Sir Richard Mottram) Paragraph 23 is essentially a summary of their assessment in paragraphs 3.35 to 3.40 and I do not agree with some of the assumptions that they have made in paragraphs 3.35 to 3.40 and I do believe that it is entirely proper to take account of the regeneration impact.
36. So the claim is that the Department used out-of-date economic growth assumptions to estimate time saving benefits. Is that true?
(Sir Richard Mottram) In the 1996 appraisal the Department used growth rates that were accurate at that point. They did not revise them in 1998. You could argue we should revise them; I am happy to revise them.
37. How often do you revise them?
(Sir Richard Mottram) If we do a new complete appraisal we look at them again. What we did in 1998 was essentially we focused on changes in the passenger forecasts. I accept that it is a perfectly proper thing for the NAO to saywe might have adopted these revised forecastsbut they are both forecasts and there is nothing particularly magical about them.
38. Do you think revising forecasts regularly is a desirable thing?
(Sir Richard Mottram) I do.
39. But the Department did not?
(Sir Richard Mottram) The Department did not and I think we might have done.