Select Committee on Public Accounts Minutes of Evidence



Examination of Witnesses (Questions 100-119)

MONDAY 9 APRIL 2001

SIR RICHARD MOTTRAM, KCB, MR ROBERT HOLDEN, MR STEVEN MARSHALL, and MS LOUISE HART

Mr Leigh

  100. To me one of the most important statements is on page 30, paragraph 3.6. "According to passenger forecasts carried out for the Government's value for money assessment, the existing network and the capacity of the Waterloo International terminal, with minor upgrades, should be sufficient to meet international demand until around 2025." Why did you not delay the link until the demand for a rail service to and from the tunnel could be assessed accurately?
  (Sir Richard Mottram) Obviously the original decision that was taken to go ahead was based upon optimistic passenger forecasts. That decision has been reviewed at least twice in relation to the Government's view about the cost benefit of proceeding with the Link. On each occasion it has been shown that the cost benefit of proceeding with the Link is positive and the regeneration benefit as part of that is significant. Ministers in both the previous Government and the present Government have decided this is an investment worth going ahead with because the outcome is positive.

  101. Yes, but at the end of the day a member of the public looking at this would perhaps be confused—as I confess I am sometimes—about the esoteric arguments about the details of finance. All they would see is that ". . . The obligations require journey times between London and Paris to be between 2 hours 55 minutes and 3 hours 5 minutes. Current Eurostar UK performance meets these obligations with the existing rail network". So if someone was looking at this from a common sense point of view they might come to the conclusion, might they not, that really what we have got at the moment is perfectly adequate and we are just spending all this money for reasons of national prestige?
  (Sir Richard Mottram) I do not think that would be the right conclusion to come to, no.

  102. Why not?
  (Sir Richard Mottram) Because we believe that the cost benefit of the project was positive.

  103. This was on regeneration.
  (Sir Richard Mottram) It is including regeneration, yes.

  104. When you say the cost benefit is positive what do you mean by that?
  (Sir Richard Mottram) As the Report explains, for this transport project, like any other transport project, we think about the monetary costs and those which are benefits to people of various kinds. We attempt to quantify both sets and then we reach a view about whether the appraisal is or is not positive. The appraisal for this project was positive in 1998, which is why the then government decided to proceed with it on a reconstructed basis. The appraisal is, in our view, positive in 2001, when we took the decision to proceed with Section 2 on a slightly different basis than the one that we originally envisaged in 1998.

  105. I am not sure we are going to get any further with that. Mr Holden, the Chairman asked this question before of Sir Richard but I am not sure he got an entirely satisfactory response, in complying with the bidding process described in paragraphs 1.1 and 1.4 did you feel that it encouraged over- optimism in LCR's forecasting of future passenger numbers for Eurostar UK.
  (Mr Holden) I do not think it increased optimism. I would agree with Sir Richard that it is important to submit realistic bids, not least because you can be counted out of the competition if you submit things which are not credible. Secondly, I think the LCR shareholders would not have achieved the return they expected from investing in the project if they had been over-optimistic.

  106. Turning to page 19, paragraphs 1.43 to 1.46, Section 2 of the Link, has your position on raising finance changed from that described in the paragraphs on page 19, Mr Holden?
  (Mr Holden) I think things have moved on since this Report was produced. It was announced last week by the Deputy Prime Minister that we have reached a Statement of Principles with the Department about taking forward the second section of the project.

  107. Mr Marshall, we have this letter from Sir Richard dated 4th April, could you expand on how Railtrack is placed on Section 2.
  (Mr Marshall) I am very happy to. The principal reason why Railtrack did not wish to exercise its option on Section 2 relates to its overall corporate situation. To be in a position to exercise the option on Section 2 we had to be in a position where we were not excessively financially stretched, we were. We were also in a position where we have on existing commitments and commitments about to be made close to 10 billion of total construction risk that the Railtrack group is exposed to. To have countenanced layering in excess of a further 2.5 billion plus of construction risk at this juncture would have been an excessive stretch for us and it would have left us vulnerable to shocks. We are also cognisant of the pressure on our people resources, given the number of projects we are grappling with at the moment, not least West Coast Mainline. For a combination of those reasons, whilst of course we wanted to see the project proceed we did not think it was tenable for Railtrack to exercise its option and that is why we began to talk to the Government about alternatives.

  108. Having decided this, Mr Marshall, do you think this is a blow for the project?
  (Mr Marshall) The project is proceeding and, therefore, no, not at all. We are delighted to see it moving forward.

  109. Do you think it casts a shadow of doubt on the project as far as are you concerned?
  (Mr Marshall) None that I can see at all.

  110. Okay. Can we turn to paragraph 2.33, on page 28, what is the likelihood that LCR would be in position to repay those loans and a pay, according to 2.33, dividends to the government in the future, Sir Richard?
  (Sir Richard Mottram) We think it is quite likely but we are not yet taking those into account in these calculations, so we are not claiming these numbers in the calculations in this Report.

  111. You think it is quite likely, did you say?

  112. Mr Holden, when do you think your company will begin repaying these loans?
  (Mr Holden) I think over the long-term that these loans will be repayable. We foresee being able to repay the loans as they fall due. We would certainly foresee being in a dividend paying situation, of which the government is in receipt of that.

  113. It is all quite vague, I know we are talking about some time in the future, perhaps it is unfair to pin you down but we are talking about public money here. In 2030 how will LCR alert themselves to the fact that the government should clearly be getting something back from LCR?
  (Sir Richard Mottram) I think you can assume that between now and the year 2030 we are going to be taking a very close interest in LCR. We are monitoring the project very closely now and we will go on monitoring it because we have a big stake in it, as this paper explains.

  114. Paragraph 2.34 states that the government will receive most of the proceeds of LCR sold at some point in the future. Do you really think such a sale is a realistic possibility?
  (Sir Richard Mottram) My answer to that is I do not know. What this deal did was ensure that if it became a realistic possibility the government would receive 90 per cent of the proceeds. That, it seems to me, to be quite a prudent thing to be done.

  115. You cannot help the Committee in any shape or form?
  (Sir Richard Mottram) I am not going to forecast whether and when this might happen, no.

  116. All of this is bit of a pig in a poke, is it not, really?
  (Sir Richard Mottram) I do not think there is anything pig in a poke in it at all.

  117. Nothing at all. You are unable in answer to any questions give firm answers as to what might be the repayment due to you or how you might get back what you have invested in the future. It is just all hope, is it not?
  (Sir Richard Mottram) The position is, as I said earlier, we are clear about the grants we are paying, they are perfectly justifiable in the context of a project of this kind. We are clear about the risk we are bearing in relation to Government guaranteed bonds, in relation to the access charges loan and we are reasonably optimistic about passenger growth in the medium to long-term—we are not reasonably optimistic, we are realistic about the level of that growth and on that basis we are satisfied that this project has a positive cost benefit to the government.

  118. On the same lines of not being able to have any firm figures on monetary value, can you look at paragraph 3.23, these are the wider policy benefits, they do not have any monetary value attached to them where apparently everything else does. Can you estimate their value in cash terms?
  (Sir Richard Mottram) No, because these wider benefits are in the way in which we approach appraisal and not quantified. As I was discussing with the Chairman earlier, the area which is unusual and debatable is whether we seek to quantify the regeneration benefits. If this was any other transport project we would apply the same appraisal technique to them all and we address these sorts of benefits and disbenefits in such an appraisal without quantifying them. I think this is a statement of the way which we appraise all of the transport projects.

  119. Would you accept this is quite an important issue, just returning back to the original question I asked you, in terms of existing passenger numbers and speeds and the rest of it to build this these wider issues are quite important, are they not, and you are utterly unable to give us any monetary value for them.
  (Sir Richard Mottram) As I tried to say earlier, if you include the regeneration benefit, which we believe it is reasonable to include for the reasons I have tried to explain, we believe that valuation is positive. If you look at these wider but unquantified policy benefits we believe that they too are positive but we would not seek to quantify them. That is our position.

  Mr Leigh: Thank you.

 


 
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