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


Examination of Witnesses (Questions 140 - 159)

WEDNESDAY 21 NOVEMBER 2001

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

  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.

  141. Why?
  (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?

Mr Donohoe

  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 question,—

Chairman

  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.

Mr Donohoe

  146. They are the DTLR publication figures, and I would have presumed that you, as an expert, would have known about them?
  (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 by 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 private finance.

  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 in December.

Chairman

  150. That is why you are so confident, is it, Mr Smith?
  (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.

Mr Donohoe

  151. Can you tell me where?
  (Mr Smith) I like a quiet life.

  152. You are not coming north of the border, are you?
  (Mr Smith) No.

  153. That is alright then.
  (Mr Smith) I should say, I started north of the border.

Chris Grayling

  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.

Chairman

  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?
  (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.


 
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