Select Committee on Transport, Local Government and the Regions Minutes of Evidence


Examination of Witnesses (Questions 100 - 119)

WEDNESDAY 21 NOVEMBER 2001

MR DEREK SMITH, MR MARTIN CALLAGHAN, MR MIKE STRZELECKI AND MR TONY POULTER

  100. How much has been spent on consultants up to now?
  (Mr Smith) In the region of £80 million has been spent on consultancy, across the board. This may seem a lot of money, but I think we must remember that the total value of this deal, in terms of finance, over 15 years, is conservatively estimated at £13 billion; so the expenditure is significantly less than 1 per cent.

  101. How can there be any realistic assessment of value for money, when the scheme is being looked at over 30 years yet the bidders are only submitting firm prices for seven and a half years?
  (Mr Smith) If I may, Chairman, I think, again, it would be helpful if Mr Poulter answered that question.
  (Mr Poulter) The bids are assessed over both the seven and a half year and the 30-year periods.

Chairman

  102. So they put the prices in on a 30-year basis?
  (Mr Poulter) I think Mrs Ellman was correct; they put their prices in over a 30-year basis, the first seven and a half years are firm, because there is a review after seven and a half years, the years thereafter are not firm, and we are therefore careful to do the assessment over seven and a half years and over 30 years.

Mrs Ellman

  103. So how then can you make a proper assessment of value for money, if it is over a period where you do not know what the prices are going to be? What are we paying you for, if you do not know what you are dealing with?
  (Mr Poulter) That is one of the reasons why there is an assessment over both periods. So the financial assessment over seven and a half years is completely firm, because the prices are fixed; over 30 years, you can look at it taking account of the bids that have been put in, some elements of which are fixed and some of which are not, but you are also looking at the wider factors which we were discussing briefly earlier.

  104. And who is going to make the judgement on what does constitute value for money for the public?
  (Mr Poulter) London Underground, subject to the approval of the Government.

  105. Could you explain how that is going to work?
  (Mr Smith) Yes. The actual decision will be taken by the London Regional Transport Board, to which London Underground is accountable. That decision will be taken following detailed assessments of value for money, along the lines that Mr Poulter has described.

Chairman

  106. The seven and a half years you can do because the prices are firm; after that we are into the realm of conjecture?
  (Mr Smith) We know some things about the next 30 years, for the next 22½ years, and we do not know others; and those factors will be taken into account by the Board. And, of course, as we have said, that Board's conclusions will be scrutinised and audited.

Mrs Ellman

  107. Do you think that the complexity and uncertainty that you have indicated is likely to inspire public confidence?
  (Mr Smith) In my view, public confidence will be inspired if we continue to operate a safe railway and that the service improves.

  108. Irrespective of the amount of money spent?
  (Mr Smith) The passengers tell us that their interest is in getting a better train service, cleaner stations, more helpful staff, those sorts of things.

  109. And does not your value for money assessment look at the comparable costs of doing that? And if all those improvements could be achieved in the public sector without PPP, might that not be a better solution than engaging the massive additional funding, the massive additional bills for consultants still unquantified, would that not be part of the assessment?
  (Mr Smith) The evidence of the last four decades suggests to us that the flow of money in the public sector is uncertain; which means that some of the difficulties that we have faced over time are that we have been unable efficiently to plan work, particularly when we have not known at the beginning of any financial year whether we are going to receive funding or not. We have not received sufficient funding, which is why we have this huge backlog, and the assets on this enormous network are decaying; and so, to us, it does seem that, while there are many attractions in a publicly-funded rail network in Britain, we cannot have one which brings it up to the standard of modernisation and performance which a city such as London requires.

  110. Are you aware that one of the major failings in the Railtrack situation, in relation to the national rail system, is that private train operators, such as Virgin, were, and indeed are, contemplating suing the infrastructure owner for hundreds of millions of pounds, because of that private owner's failure to comply with the contract and bring improvements? And, surely, that is a failure for the privatised system. So you are telling me that you believe a privatised system is inevitably better; surely, that evidence just flies in the face of that?
  (Mr Smith) I am not telling you that a privatised system is better. I am saying that the system we have developed is very different from that which is there on the national railway. What I can say is that we consider that we have a structure within our performance-based contract which incentivises the infrastructure companies to provide services to the public sector London Underground, which will improve the performance of the assets, and that improving the performance of the assets will improve the performance of the service to London.

  111. What have you built in your estimates for compensation payments, should the track owner fail to deliver what the private operator wants, or, indeed, the other way round?
  (Mr Smith) We must be clear, the operator, in this case, with the PPP, is a public sector operator, London Underground Limited will remain the operator of the trains and the stations, and it will be, ultimately, democratically accountable to the Mayor, when the transfer to the GLA takes place.

  112. So are you saying there is no possibility of any operator or owner of any part of London Underground being in a situation where they are seeking compensation?
  (Mr Smith) The operator is in the public sector. What happens is that the infrastructure companies, who are seeking to improve the assets, are incentivised on the basis of the level of performance they achieve.

Chairman

  113. Incentivise is a word that means what, they are going to be offered very considerable bonuses as long as they are not as bad as we expect?
  (Mr Smith) I do not believe that is so, Chairman. They make profit if they perform well, and they suffer loss if they perform badly.

Mrs Ellman

  114. But suppose they blame someone for failure to perform; Virgin blame Railtrack?
  (Mr Smith) We are back here, really, to fault attribution. Which is why we give such attention to it.

  115. What assessment have you made for financial penalties in relation to fault attribution?
  (Mr Callaghan) Our structure is very different from the national railway structure, it is not a privatisation. The way in which the private sector is rewarded for what it does is predetermined in the contract, and there is not the same opportunity as there might be in other structures for the sorts of claims that you described. I am completely confident that that situation is not going to arise in our structure.

  116. There is no opportunity, or a different kind of opportunity?
  (Mr Callaghan) There is no opportunity for one private sector part of the structure to claim against another part.

  117. What is the ongoing requirement for public subsidy for this system?
  (Mr Smith) That is very hard to assess, until such time as the final bids are in; we have calculated, therefore, the value for money and affordability of this. In my mind, there will undoubtedly be subsidy.

  118. Forgive me; how can you assess value for money if you do not know what the ongoing public subsidy requirement is?
  (Mr Smith) We distinguish between assessing the value for money of doing this compared with other forms of raising finance, and then we have to judge the affordability of doing this within the policy requirements established by Government.

  119. And is the question of the amount of public subsidy required not a relevant issue?
  (Mr Smith) It is, most certainly, a relevant issue, but, in many ways, it is a matter for Government. There is a social choice here between the amount of money for an underground railway of this kind that is raised from the fare box and the amount that is funded by subsidy; in other countries, a far higher proportion is provided by subsidy, generally speaking, than in this country.


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 21 December 2001