Examination of Witnesses (Questions 140
WEDNESDAY 21 NOVEMBER 2001
140. The risks can sit wherever you think are
appropriate, but, at the end of the day, if my analysis of this
situation is anything to go by then there is no difference between
the position you are in just now and the one that you would be
in if the PPP is the favoured way forward?
(Mr Smith) I do not think that is a proposition that
we would accept; we will try to explain it to you.
(Mr Callaghan) The specific point that Mr Smith made
at the beginning was that one of the ways that we get efficiencies
in this structure, that we are not able to get now, is because
we know in advance how much funding is going to be available;
and, as you say, that money comes partly from the fare box, it
comes partly from the taxpayer. The money is dedicated to delivering
the improvements that we need in the underground, and that amount
of money is not affected by the amount of money that is generally
available to the companies who are doing this work, it is dedicated
to doing the work on the underground. So it is not vulnerable
to the wider economy, in the way that you described.
142. But Mr Smith, earlier, and I will address
this to you, Mr Callaghan, made the statement as to how much income
there was from the public sector, either by fares or subsidy,
in the last year; now I understand that the operating surplus
last year was something in the order of £73 million. Almost
one third of the finance for the PPP deal is supposed to come
from this operating surplus, and the evidence, on this evidence,
surely, is you simply cannot afford to sign up to this PPP deal?
(Mr Callaghan) As Mr Smith said in his previous answer,
the amount of money that is going to be spent on improving London
Underground is a public policy decision, the money can only come
from one of two places, it can come from the passengers and the
fares they pay and it can come from the taxpayer, through subsidy.
143. You see, the thing that I am finding difficult
is that, if my understanding of the private sector is anything
to go by, and I have worked in the private sector, they are looking
for a profit, that is the whole basis of their investment in the
first place. If the fares and the monies that have been raised,
coming from the public sector, do not match their expectations,
and that, for whatever reason, they run into difficulties, how
are they then, in these circumstances, going to go ahead, with
the confidence that you are suggesting, to invest?
(Mr Callaghan) From the point of view of the private
sector, we are not requiring their returns to be a matter of how
much money comes in through fares; we are paying them to do a
programme of work, and in delivering that programme of work well,
yes, they will earn a profit, like anybody does who does work
well in the private sector.
Chairman: I think he is asking you something
different, Mr Callaghan, is it not; he is saying, you are supposed
to cough up 30 per cent, and the estimate from one of the DTLR
papers was that we were talking about an operating surplus on
fares of £240 million per year. And what you produced in
the last financial year was £73 million, and even in the
previous year it was only £154 million. So you are being
asked something different; you are being asked where are you going
to find the difference between the 73 that you actually had and
the £240 million that it is estimated you would be required
to find? Mr Poulter, do you have the golden sock under your bed?
144. Somebody has to have.
(Mr Smith) I wish we had.
(Mr Poulter) If there is a difference between what
London Underground contracts to pay for the performance that is
delivered and the amount of operating cash flow it has then that
would have to come from Government support. To go back to Mr Donohoe's
145. Not too fast, Mr Poulter, not too fast.
So if we have the same amount, the same figure, let us take £73
million as the figure concerned, and the estimate that is made
by the Ministry, not by anybody else, is £240 million, you
are saying to us that the difference between the 73 and the 240
would have to come from the public purse?
(Mr Poulter) If those figures are right. I do not
recognise them; but if they were right then in the public sector
that is the case.
146. They are the DTLR publication figures,
and I would have presumed that you, as an expert, would have known
(Mr Poulter) I do not doubt them. I am saying I do
not recognise them.
(Mr Callaghan) Are you asking about the private financing?
Because there is a question about how much money is paid, year
147. It is me who asks the questions, by the
way. If you can maybe suggest that I have not got the right figures
then that might be something else?
(Mr Callaghan) The reason we are doing this is that
we cannot afford to pay, year by year, what it costs to improve
the railway; so we are going to do a very large programme of work
in the early years which we cannot afford to pay for year by year,
and it is why we are asking the private sector to provide finance
for it. So it is certainly true that in the early years the amount
of expenditure under the PPP will exceed the amount of money that
is being paid to the private sector, and that is covered by the
148. Mr Smith, what confidence have you got
in this system?
(Mr Smith) I am confident that this system can and
will work, but it must be subject, of course, to our final assessments
on value for money.
149. Are you going to be around to see it out?
(Mr Smith) No, I am not. I am leaving the company
150. That is why you are so confident, is it,
(Mr Smith) No, Chairman; my contract with the London
Underground was ending in January 2002 anyway, and I am leaving
in December to go to the Health Service.
Chairman: Don't tempt me.
151. Can you tell me where?
(Mr Smith) I like a quiet life.
152. You are not coming north of the border,
(Mr Smith) No.
153. That is alright then.
(Mr Smith) I should say, I started north of the border.
154. Can I go back to something Mr Poulter said
earlier. You said that costings are firm and fixed, that is regards
the private contractors, for the first seven and a half years,
but the costings they are submitting are over 30 years and there
is no certainty for the last 22½ years; is that correct?
(Mr Poulter) That is correct.
155. What financial provision, if any, are you
aware of that is being made within the public sector for the possibility
that those costs might run amok?
(Mr Poulter) There is a protection against them running
amok, in the form of a statutory arbiter, whose job it is to determine,
for the periods after seven and a half years, what economic and
efficient cost of the provision of the services would be, if that
is not agreed between London Underground and the infrastructure
companies. The Government is obviously aware, and will be aware
when the revised bids come in, of what the projections are beyond
year seven and a half.
156. The reason I ask the question is that there
have been reports, and I would be interested if Mr Smith could
comment on them, that, when the first discussions took place with
potential bidders about the amounts of money that would be required,
the Treasury had a fit and sent back an instruction that the costings
had to be brought down, and particularly that some elements of
the work, particularly the expensive stuff, had to be pushed into
the later years? And the two facts alongside each other, that
we have no guarantees after seven and a half years and the reports
that the Treasury said, "Let's push the expensive stuff into
the far distant future," caused me concerns about what the
far distant future may actually represent?
(Mr Smith) I find it very hard to picture the Treasury
having a fit. I think it is true to say that decisions can be
made around programmes of this sort, and those are the kinds of
decisions that may need to be made in the future about where,
say, line upgrades take place; and, clearly, the later they take
place then the less money has to be raised up front.
157. So you are saying that it is true that
Treasury suggested it?
(Mr Smith) No, I am not. I am saying that the public
sector will always have to make those kinds of decisions, because
the amount of resource available to it is not infinite.
158. So it is not true that the Treasury had
that sort of concern?
(Mr Smith) Not to my knowledge. I am afraid, I am
not privy to the workings of the Treasury.
159. But you must have discussed this with them,
(Mr Smith) We have certainly discussed the overall
shape of the deal, and, indeed, the sort of commitment which the
Treasury might have to make over the long term.