Examination of Witnesses (Questions 80
WEDNESDAY 21 NOVEMBER 2001
80. Mr Callaghan, we are not questioning your
commitment, we are just trying to sort out what it is you intend
to do, and what you are really saying is that, you actually used
the word `maintain' for seven and a half years?
(Mr Callaghan) We are going to replace the assets
as fast as we can, and we are going to maintain them while we
are replacing them.
Chairman: I do not think we are getting very
far on this.
81. Can I just press you on the value for money
aspect. As I understand it, it is Ernst & Young who are going
to do the final assessment for you; is that correct?
(Mr Smith) Yes.
82. And are they perfectly clear about what
they have to do, given that they, in their own submission, are
actually looking at a methodology for doing it?
(Mr Smith) Yes. Again, I think I would like to turn
to Mr Poulter, if I may, to give detail as to how we are going
to do this.
(Mr Poulter) Just to clarify, Dr Pugh. We, at PricewaterhouseCoopers,
are helping London Underground do the value for money assessment.
It will be assessed using a methodology which has been audited
by KPMG, and Ernst & Young are doing what I would call a value
for money audit, to advise the Government on whether they are
satisfied that it is being done properly.
Chairman: It includes the fees of all the consultants,
83. Yes, proper evaluations, but the evaluation
process, you acknowledge, is going to be a fairly complex one,
and certainly not a lucid one, so far as most of us are concerned?
(Mr Poulter) Yes.
Dr Pugh: Do you see substance in the submission
to this Committee by the Borough of Kensington, who say that,
when faced with the criticism
Chairman: Order, order. The Committee stands
adjourned for 15 minutes.
The Committee suspended from 4.35 pm to 4.46
pm for a division in the House
Chairman: Order. Dr Pugh.
84. I was just going to ask you, before we were
interrupted, do you agree with the London Borough of Kensington,
in their submission to this Committee, that, given the sheer complexity
of the assessment that needs to be made, it is possible for you
to hide behind these factors and produce what is, in the end,
a subjective result, and nobody is very clear as to how you have
arrived at it?
(Mr Smith) Mr Poulter has described the extent to
which this decision is going to be professionally scrutinised.
It is quite clear, it is also going to be publicly scrutinised.
And I do therefore consider that all the factors in this decision
will be examined in the minutest detail and that we will be unable
to hide behind anything.
85. Given that, can I quote from the submission
of the London Transport Users Committee, who say: "We would
regard it as prudent for the Government to invite the National
Audit Office to revisit the PPP before finalising any contracts."
Do you share that belief; would it be a good thing?
(Mr Smith) We have expressed the view that we would
be very happy for the National Audit Office to do that, but I
understand that the National Audit Office would, in fact, examine
the conclusions that we come to after the deal has been completed.
86. But you would not object to them going first;
and, to put a hypothetical question, if they went first and if
they delivered a different verdict from the one you favoured,
or the one that Ernst & Young come out with, would you still
(Mr Smith) To answer your first question, we would
have no objection to the National Audit Office examining this;
and, in fact, in order to enable their ex post facto examination,
they are already involved with us and looking at what we are doing,
because they cannot do everything after the event. My answer to
your second question would be that
87. Before you leave that, it is not quite the
same thing, is it? You will know the recommendation this Committee
made before, Mr Smith?
(Mr Smith) Yes, indeed, Chairman, and I think that
stimulated the first involvement of the National Audit Office.
88. And, therefore, the fact that you are talking
to them about what they would look at after you had taken the
decision and signed the contracts is not the same thing, is it?
(Mr Smith) No, it is not. As I said, we would be very
happy to be involved with the National Audit Office in any way
appropriate, but it is not our decision as to when they would
89. But you would be happier to go forward with
their blessing, rather than without?
(Mr Smith) We would be happy to go forward with their
blessing, or for them to examine it afterwards.
90. Moving on to what happens years down the
line, I understand, in a PPP, that what will happen is, penalties
will be imposed where people do not deliver and rewards will be
given when they do. If they get it badly wrong though, in the
way that Railtrack have got things badly wrong, and they become
insolvent, what happens then?
(Mr Smith) Chairman, may I ask Mr Callaghan to explain
the arrangements around the contract termination.
(Mr Callaghan) What happens is that the performance
of the infrastructure companies is obviously measured over time,
and there are performance standards to which they have to adhere;
and if they fail to do that there are predetermined rules in the
contract which describe the basis on which the contract will come
to an end. And so the arrangements under this contract are not
the same as the arrangements in the Railtrack situation, because
the rules for what will happen in those circumstances are laid
down in advance.
91. If, on the other hand, you get it wrong
in a contract and, say, sufficient modernisation is not built
into the contract, sufficient developments, I understand the Mayor
of London then needs to consider whether further action will be
taken; is that correct? It is no longer your responsibility, up
to that point?
(Mr Callaghan) The arrangements for what happens to
London Underground after the Public Private Partnership is implemented
are that, under the GLA Act, London Underground will become a
subsidiary of Transport for London, and then what happens in the
future, in relation to the PPP, will fall within Transport for
London's statutory duties, in relation to transport generally
92. And the resources at their disposal, whatever
(Mr Callaghan) That is correct, yes.
93. Thank you. Finally, a lot of Parliamentary
Answers have elicited recently that there has been a severe deterioration
in performance, on many aspects of the underground; one notes
things like the very high rate of absenteeism and the fact that
it is increasing. To what do you attribute this, is it demoralisation,
not knowing their future, or, alternatively, is it just poor management,
and has it anything at all to do with your preference for a PPP?
(Mr Smith) If I might respond, Chairman. We have had,
in the last year, or so, certainly a problem of staff absence
in both trains and stations; in stations, we have rectified that
completely, and in trains nearly completely. And I do believe
that there was insufficient attention being given to this matter,
which meant that we had to suddenly give it a lot of attention,
and we have brought the position back to a level of absence which
is acceptable, but can still be improved.
94. The next round of published figures will
make very different reading?
(Mr Smith) Indeed, they will.
95. Just to ask Mr Callaghan; you said that
you are going to come under the responsibility of Transport for
London. Will there not be a tension there, if they are not in
favour of the PPP?
(Mr Callaghan) The statutory arrangements are that
Transport for London will inherit the PPP, as it is implemented
under the current structure. Obviously, we are extremely keen
to work alongside Transport for London for that to be a smooth
96. When you described the arrangements for
assessing value for money, you described what sounded like a consultants'
paradise, with one group of consultants reporting to another.
How much money do you think we are going to be paying consultants,
over the next 30 years, which is the period that the assessment
is for, if this proceeds? Have you made any assessment of that?
(Mr Smith) No, we have not. The description of the
assessment of value for money was around the fact that the work
that will be done by Pricewaterhouse, advising us, needs to be
independently audited, and that is what KPMG will be doing. The
Government wish to satisfy themselves, independently, that the
work that we have done is indeed appropriate and value for money,
and so that is why they have engaged Ernst & Young. So there
is no doubt that this decision, or set of decisions, will be well
audited. Now the use of consultancy going forward is very difficult
to predict; there is no doubt that London Underground, or Transport
for London, as it will be, will use consultancy for many aspects
of the development of railway networks in London, they will want
to look at which line upgrades are appropriate and are not, whether
new lines will be available, so there will be a huge amount of
consultancy work there. And, of course, the private sector infrastructure
companies themselves, separately, will be employing consultants
to look at the projects that they need to undertake and to design
and plan them.
97. Could you make any assessment of what kind
of money we are talking about; is it millions, billions, what
are we talking about?
(Mr Smith) It will most certainly be millions, but
very difficult to assess more accurately than that.
98. And if KPMG were wrong, could they be sued?
(Mr Smith) I assume that it would be possible that
if they performed their responsibilities negligently, as any other
consultant, they would be accountable for that, and could be brought
99. So you think they could be accountable if
this system goes wrong?
(Mr Smith) But the decision, of course, is the decision
of London Regional Transport, audited by others.