Examination of Witness (Questions 235-259)|
WEDNESDAY 28 NOVEMBER 2001
235. Good afternoon. I am very sorry that we
have kept you waiting. I wonder if you would be kind enough, well-known
star of stage, screen and radio, to tell us who you are?
(Mr Kiley) Thank you, Madam Chair. My
name is Bob Kiley, and I am the Commissioner of Transport for
London, and I am glad to be here.
236. Did you have some remarks you wanted to
make, Mr Kiley?
(Mr Kiley) If I could just take one or two minutes;
thank you for the opportunity. I think it would be appropriate
for me to say, up front, since we tend to concentrate on the problems
of PPP, at least I do, something about what the alternative might
look like, in just a moment or two. The one thing that we would
do is to assemble a very strong management team for the Underground,
which has to be done, in any event, but it would be one concentrating
on the engineering and construction and renewal problems. We would
do something that I have been concerned about from the moment
I got here, which is to do a `stem to stern' assessment of all
the physical assets, which has not been done thoroughly to date.
On the basis of that, we would develop a five-year plan that would
include well-specified projects, you would have their scopes,
their time-frames, schedules and their budgets; these would be
subject to annual review, but they would be very clear, they would
be solidly based on inputs arising from the assessment of the
physical plant. Our financial plan, we would hope, and we would
certainly like to have Government support for this, otherwise
it becomes difficult, to get us access to the capital markets
on our own, which will be a much less expensive way to raise the
money that will be required over a 20- to 30-year period. And,
finally, we would rely very heavily on the private sector to do
the capital works and a fair amount of the maintenance activity,
but, in our case, we would be seeking to get more companies than
are likely to be involved under PPP, keep competition going throughout
the life of this project, and the work would correspond to the
assessment of the physical plant and the priorities established
in the capital plan. Thank you.
237. In that case, can I ask you whether your
assessment of a fixed annual Government subsidy of £623 million
(Mr Kiley) I have seen estimates that range all the
way from just over £600 million upwards of £1 billion,
and I do not think we know for sure, before the final bids are
in, just what PPP is projected to cost, but my view is that we
will be able to do the renewal of capital works for less than
is now being estimated for PPP.
238. So, supposing there were some kind of dubiety
about the Government's level of funding, would that undermine
the success of what you are putting forward?
(Mr Kiley) In truth, the Government has not yet made
a clear, explicit, written commitment, it certainly has not done
that for 30 years, and it is difficult, in any event, for one
Government to bind another. But I get a little nervous about what
happens after seven and a half years, even if the Government makes
good on its commitment for the foreseeable future, because there
is contract language now that suggests that if the private sector
is unable to raise resources in the market-place themselves they
will come to Government, which by that point will be my organisation,
and make claims on us which we will be obliged to respond to,
with or without central government support.
239. I suspect my colleagues will want to be
asking you about that, exactly that point. London Underground
have said your proposed management plans are insufficiently detailed
to be evaluated. Have you looked to them for any discussion, have
you discussed any of this with London Underground?
(Mr Kiley) We have produced three iterations of this
plan, starting last December, almost a year ago, a second, more
fully refined plan was produced in April, and yet another one
toward the end of the summer; it is on our website, it has been
publicly available, it has been distributed to the Underground.
But, no, there really has not been an extensive discussion with
either the London Underground or the central government.
240. Whose fault is that? Let us take London
Underground first: whose fault is that?
(Mr Kiley) The London Underground has a clear remit
from the Government, and that is to negotiate PPP, so there has
been no sign of interest in any alternative, to date.
241. They have not asked to discuss any of the
details in your plan?
(Mr Kiley) No.
242. And you have not asked them to discuss
them with you?
(Mr Kiley) It has been in their hands, and perhaps
we should be more aggressive in getting them to sit and listen
for any length of time to what it is we have to say.
243. And you made it clear to us that you have
tried very hard to speak to the Chancellor of the Exchequer, on
the basis that his was the final decision on the plans, and you
have not had a response; is that still the situation?
(Mr Kiley) That is still the situation.
244. If this PPP fails, how long would it take
to put your management plan and your finance into place?
(Mr Kiley) Let us try to understand what is involved
with the PPP and then I will compare what we will try to do, by
contrast. The Secretary of State suggested, just over the weekend,
that the review of the safety case might not be complete until
April, and that conforms with what we have heard as well. There
will still be a period of time, even if they reach commercial
close with the bidders, where serious discussions of how this
will be financed will really commence. It is very hard to know
how long that will take, I believe. I believe it will take longer
in the current economic climate than one might have anticipated,
say, as recently as a year ago. So it would not surprise me if,
as the Secretary of State seemed to be suggesting, the actual
completion of the entire process and the transfer of the asset
to Transport for London could go as late as this coming
summer, it could last even longer, depending on what happens in
this last round of bidding and contractual negotiations. If the
PPP were to end today, we are in a position to move very quickly,
and if transfer could be executed very fast, it has been estimated
to range anywhere from two months to four months, and I think
a lot of that could
245. Whose estimate was that?
(Mr Kiley) This was an estimate that was given to
me last summer, at the time that I was talking to the Government
about becoming Chair of London Regional Transport. When I suggested
that they actually begin the transfer process right then and there,
they do not have to pull the final trigger on it, but they could
get a lot of the bureaucratic requirements out of the way, in
parallel with whatever was happening with respect to PPP; they
could still do that, and I think it would be in their interests
to do it, but it would take us a matter of months to get organised.
It is critical to get good talent into the engineering and construction
management oversight areas, and that will probably be the most
substantial undertaking that we will have to take. I know of a
number of people who would be interested in getting involved with
the Underground, if they felt it was manageable; getting the finance
together will depend, at least in part, on the Government's willingness
to continue a commitment to the renewal and the support of the
Underground, and we would hope that we would be able to get to
the private finance markets through securitising, for example,
a small fraction of ticketing income.
246. Before I open the questioning to my colleagues,
I just want to clear one thing with you. You say you have not
been able to meet the Chancellor of the Exchequer; have you talked
to any other Treasury Ministers?
(Mr Kiley) No, we have not. I did speak tono,
only civil servants or political advisers.
247. To your knowledge, have any of the value
for money studies looked at the alternatives?
(Mr Kiley) The value for money analysis that has been
done to date, by the Underground and their advisers, including
PricewaterhouseCoopers, has always compared the bids to the public
sector comparator that they have created, largely the creation
of PwC. That public sector comparator has changed and it has had
embellishments added to it over time, so it is never static. Our
view is that the public sector comparator is not a fair representation
of what an actual public sector performance might be, and we feel
that there are real shortcomings in that model; but even with
that model our feeling is that the original estimates of savings,
done in 1999 by PwC, the same organisation that does the analysis
of the comparator itself, where an estimate of £4.5 billion
was projected over the life of the franchising process, has just
turned out to be dead wrong. And even by our analysis done in
April and then in September, most recently in connection with
the designation of the preferred bidder on the sub-surface lines,
is that there are almost no savings to be realised, even in terms
of their own analysis.
248. Has the public sector comparator looked
at improvements in efficiency that might be possible in the public
(Mr Kiley) I think that assumptions have been made,
that lie at the base of the public sector comparator, that suggest
that the public sector will be a relatively inefficient way to
go. So I do not think they have had a model that, while there
are ranges in the model, a model that is based on an aggressive,
forward-leaning, well-managed, public sector alternative; and
there certainly are those alternatives around the world. Perhaps
there has not been any recent experience with one here, and it
tends to slant people's view of what ought to be done.
Chairman: I think you can say that without fear
of exaggeration, Mr Kiley.
249. Could you give us any information about
improvements that good management structures can make, from your
(Mr Kiley) In my view, if you are very aggressive
about creating a plan and specifications for individual projects,
that are very precise, and if you put the effort in and take the
time to cost out what it is you are planning to do, before you
put it out for tender, no matter how large the project or complex
the project, your chances of being able to deliver that project,
getting a bidder and a contractor who will deliver that project,
on budget and on schedule, are greatly enhanced. There are situations
in which you can go forward without necessarily finishing design,
as long as you are very clear-headed about where it is you are
going, and as long as your financial people are constantly on
top of the design process so that it does not spin out of control;
there are instances when you can do it that way, because you can
save time. But those are the key ingredients to successful project
management. And you have to have the talent, the human resources,
to make this possible. You can have all the money in the world
and it can be squandered.
250. Could you give us any examples of achievements
you have been able to make, in that field?
(Mr Kiley) I have overseen renewal programmes in two
cities, Boston and New York, I was in New York for seven years,
and, there, we had the opportunity to spend, during the period
that I was there, close to $12 billion, and, among other things,
we had a subway car fleet, 6,200 cars, carriages, that were in
a state of acute disrepair, and over that period of time we were
able to replace or refurbish the entire fleet. And, at the start
of that road, the then existing fleet, which was in very bad shape
to start with, was covered from stem to stern with graffiti, the
485 subway stations in New York were similarly covered, and by
the end of that period of time the graffiti was gone. And so I
think the car fleet went from being among the worst in the world,
in terms of performance as measured by the distance travelled
between failures in the car, to what is now, today, one of the
most successful car fleets in the world.
251. Those examples are both from the United
States. What discussions have you had with either management,
personnel, in this country or trade unions that lead you to believe
that those examples can be replicated in London, in the UK?
(Mr Kiley) There is no question that in the London
Underground there are managers, employees, workers, who really
desperately want a renewal programme to begin. Clearly, one of
the reasons why the Underground signed up for PPP was on the belief
that this was the only way in which resources were going to come
to the system; so I give them A for desire, not such good grades
for recognising a lemon when they saw one. But I understand how
that desire can get in the way of judgement. I think there are
also people in the Underground who are very talented and committed
and who would like to stay the course, once the renewal programme
begins; there are not nearly enough of them, and there will have
to be some additions, especially to project management, if we
go that route. If we are into a contract administration mode,
which is what would happen with PPP, as I said the last time I
appeared before this Committee, it is very difficult to imagine
how this will be managed, from either TfL's standpoint or the
London Underground's standpoint, because this is such a complex,
convoluted regime that there are all kinds of odd-sounding titles
that will be involved in this, fault attributors, infrastructure
controllers, it is almost Orwellian. And I have to confess that
gearing up for that, I think, is going to be extraordinarily expensive,
very distracting from the business of actually running the trains
and doing the programme; and it is one of the reasons why this
is a dangerous scheme, because the contract regime is so difficult,
I think it just gets in the way of rational management. You asked
about the unions. I have spoken to them on several occasions,
they are very eager to get on with it. I realise that industrial
relations leave almost everything to be desired right now in the
Underground, and I think this frustration and this sense of drift
is as much the cause of that as any particular grievance.
252. Mr Kiley, clearly, you are not wedded to
the concept of the PPP.
(Mr Kiley) Yes, that is clear.
253. If it were to go ahead, in the form that
is proposed, and you do not modify your view, do you envisage
tensions between yourself, the contractors and London Underground?
(Mr Kiley) I think that any sensible, rational management
of PPP, if that is what it comes down to, will have to continue
to look very hard at the contractual arrangements; they are very,
very, very inadequate, they do not lend themselves to management.
And I think any responsible management, with the public interest
keenly in mind, would be pressing very hard on the contractors
to make changes in the contracts that will lend itself to sound
management, and I think that will become evident in very short
order. That is not a desirable outcome, but, if we get PPP in
roughly its current shape, that is almost sure to happen.
254. Can I ask you about the contractual arrangements.
If, during the life of a contract, one of the contracting companies
goes bust, what would be the potential cost, first of all, to
you, at Transport for London, and, secondly, to the taxpayer?
(Mr Kiley) That is a good question. I would rather
not just pull a number out of the air and give it to you. I can
think about that a little and get back to you with a number. But
even when a consortium goes bust, or gets into financial trouble,
or wants, for whatever set of reasons, to disengage, there is
a protracted process to which we will all go while a new company,
or consortium, is found to take its place. So it is not as if
a company goes down, unless there is some huge safety challenge
that is presented, that the public sector steps right in and simply
takes over the operation, that is not the way it works; in fact,
it is much more difficult to do what happened to Railtrack at
the beginning of this month, with respect to PPP, it will not
work that way. There is no public interest termination right built
into this contract, that right basically has gone.
255. So could I just press you on this point.
Because we have had Railtrack forced into administration, and
we have seen the consequences for the performance by the existing
rail operators that that has brought about. In your view, this
gap, is it going to have grave consequences for the delivery and
for any potential investment under a contractual arrangement?
(Mr Kiley) When you say `this gap'?
256. You say that there is no public sector.
(Mr Kiley) I think it is poor public policy, for at
least two reasons. One is that you always have to make some allowance
in a contract, especially one that lasts for 30 years, for something
going wrong, and the ultimate thing going wrong is a company that
is unable to perform for some reason. You should have the ability
to terminate the relationship; there will be some costs associated
with the termination, to be sure, and you have to be fair in that
process, but that is missing. But, secondly, and related to the
first reason, that is the ultimate sanction, it is a very important
pressure point, as well as a heavy weapon, it is one that you
have to have in your armoury, and, if you do not have it, contractors,
at some level or another, are not going to take you as seriously
as they would if you did have it.
257. You said that you would like to have the
direct relationship access to capital markets; if that were to
happen, in your view, do you think it would be easier or more
difficult to raise the capital required, after September 11 and
after Railtrack has gone into administration?
(Mr Kiley) We certainly are in more parlous economic
times than when this procurement began, almost four years ago.
It is, I think, hard to assess what the longer-term impact of
September 11 might be, it is not going to be particularly positive,
but in this particular instance it may not necessarily be negative.
I feel that if you are into the capital markets and you have something
truly worth selling, in this case a security, let us say, based
on ticketing income to the Underground, and if you have support
from a Government entity for that, in this case GLA, then this
will be a very inexpensive way to raise capital and there will
be purchasers of these securities. This is not an unusual way
to get to the capital markets for organisations like Transport
for London, or the London Underground, it is done all the
time around the world, and this is really the way, essentially,
this was the essence of how the New York City subway system and
commuter rail system was rebuilt.
258. Can I start off by asking you, Mr Kiley,
clearly, you would like to take direct responsibility for the
modernisation programme, but we saw with the Jubilee Line Extension
that London Underground proved very inadequate at managing a project
and controlling its costs on that scale. Why would we be confident
that Transport for London could deliver effective project
management in a way that London Underground was not able to do
over the Jubilee Line?
(Mr Kiley) When I made my comments about the alternative,
I was very careful to say that you had to have a plan, with projects
that were very clearly specified, scopes clear, budgets clear,
well costed, and that you had to have the certainty of available
resources. And I think most of those elements were missing, especially
the certainty about resources, which was not a problem created
by the London Underground. That uncertainty, created by the Government,
and the unpredictability of funding on an annual basis, with gaps
existing, there was an 18-month period in which no resources were
flowing, as people searched around in the private sector for resources,
it is very difficult, if not impossible, to manage a project under
those circumstances. So I do not want to mislead anyone here.
If you do not get that commitment, over the long run, of financial
resources, and if we are not all prepared to adhere to that commitment,
as long as things are going well, then we will not succeed, and
it might be better not to even try, because you end up with unfortunate
outcomes like the Jubilee Line, which has simply not come close
to delivering what it hoped to, by way of car throughput during
the rush hours.
259. When we have been discussing the problems
facing the national rail network, one of the issues that has been
raised is the lack of an asset register, which has had a knock-on
effect in the cost overruns on the West Coast Mainline, it has
proved to be much more expensive than expected. Is there, to the
best of your knowledge, an adequate and up-to-date register of
London Underground's assets which will enable either PPP contractors
or indeed yourselves to create a genuine, true assessment of what
the cost of modernisation will be?
(Mr Kiley) I think that is one of the most serious
problems permeating the entire procurement, that while there is
some information about the condition of the assets it is very
imperfect and incomplete. And were we to rewind the clock and
start again, whether it was PPP or any other major effort to renew
the Underground, the very first step that should have been taken
was, as I mentioned earlier, the thorough-going assessment of
the needs of the Underground, so that every part of the infrastructure
to be potentially renewed would be known, and you would actually
be able to put a cost estimate, which would not be the final cost
estimate, and you would add that up and you would have the total
universe of need. Based on that knowledge, you then would determine
what are your priorities, what do you want to get done in the
first period of time, let us say it is somewhere between five
and eight years; out of that comes a plan, and you do more refinement
of the costs, and there is far more knowledge up front than now
exists in PPP, the contractors are to be, basically, rewarded
or penalised, on the basis of what I would call once removed outcomes,
is the service ultimately reliable, and ambience of stations and
inside cars. And, while those are desirable performance outcomes,
it has to begin with a certain knowledge of where it is you are
going with the physical improvement; and that is missing from
PPP, and the asset register will be developed over time. There
should be an asset register now available that is complete, and
there is not.