Examination of Witnesses (Questions 320-340)|
WEDNESDAY 28 NOVEMBER 2001
320. You can never be found wrong; well that
is very useful. Is it possible to assess value for money over
30 years when prices are given for only seven and a half?
(Mr Colman) That, I think, brings me back almost to
the first thing I said, which is that you can do a calculation
that takes account of what can be quantified; at best, that calculation
is only part of the story. In the case of this deal, you can quantify
what you think might happen in the first seven and a half years,
you can quantify what might happen in the next 22Ö; that
is even more uncertain than usual, because of the break-points
in the contract. And so that means that, in taking a decision
on value for money, one of the points to be taken into account
is the very uncertainty created by the break-point. So the justification
for doing this PPP, or any PPP, must rest on a strategic view
about how the business is to be run. If it is considered necessary
to have break-points in the contract, and I can well understand
why that should be, then that is an issue to be considered, it
is one of the wider factors; it is very difficult to calculate
what the impact will be.
321. Can I take you back, you made the point
about it is impossible to judge in ten years' time what the cost
of renewing an escalator at King's Cross may be, but, as an auditor,
if you look at the way in which the current contracts and costings
are being framed, is it your view that there is enough knowledge
about the current state of London Underground's assets to be able
to make what in your eyes would be a satisfactory assessment of
the costs that will be incurred, even in that first seven and
a half year period, to meet the standards you would expect, as
(Mr Colman) I think, as an auditor, I do not have
an opinion about whether now is the right time to do the deal.
If the Department and London Underground decide to do the deal
now then they have to manage the risk that is created by the fact
they do not have a very full knowledge of their asset base. I
think, as an auditor, I have no opinion as to whether they should
do it now, or
322. I am not asking you about whether it should
be done now or not, I am asking you, is it your opinion that enough
information is known about the current state of London Underground's
assets to enable a contract to be signed with a price attached
(Mr Colman) I do not think I have a view about that,
as an auditor. I can imagine arguments that could be used to justify
proceeding, even in those uncertain circumstances, with a contract,
along those lines. I do not think those arguments are necessarily
323. But if I were building a house and you
were my accountant and I was doing it on the basis of no knowledge
of what the subsoil was, you, as my accountant, might question
the judgement I had made about the overall costings of it; and
that is what I am trying to get. Do we actually have enough information
about London Underground's assets to enable us to take a financial
judgement about the cost of modernisation?
(Mr Colman) If I were your accountant, Mr Grayling,
you would be paying me fees for my advice.
324. You would be a very expensive accountant,
(Mr Colman) But very good value for money, Madam Chair.
The situation I am in now is not as an adviser to London Underground
or the Department, my position here is an independent external
auditor on behalf of Parliament, and I really am not in a position
to advise them on what they should do.
325. I am grappling to understand why it is
difficult to answer. I am not asking you to judge what Parliament
should or should not do, but what I am trying to be clear on is
the level of information at the disposal of the public sector
to take a judgement about costs, and you yourself said, and I
fully accept that ten years down the road the price of escalators
may have doubled, for some unforeseen reason, but we are, nonetheless,
expecting the Government to put a fairly firm price on the work
to take place in the first seven and a half years. You all heard
Mr Kiley's evidence, in which he said that there is no clear asset
register which would enable us to understand the current condition
of assets and make a judgement about the costs of improving those
assets. Now my concern is, and the reason I am asking your view
of this, as an auditor, is, is there an extent to which we are
guessing at this? And that is what I am trying to understand from
you. I am not asking you to judge the rights or the wrongs, I
am just asking you to give me a professional judgement on the
quality of information available to us and the degree to which
that enables someone to make a realistic assessment of cost?
(Mr Colman) It is quite clear that there is uncertainty
about the state of the assets. Mr Kiley thinks, and he may well
be right, that means there is very great uncertainty about the
cost of debt and the cost of the capital programme; those are
matters to be taken into account. I do not think I can add to
that, really. I cannot say that nothing should be done until that
risk has been removed, because that would be going beyond my role.
326. Can I just ask you, there has been a significant
deterioration over the past two years in London Underground's
operating profitability, or lack of it. The cash flows of London
Underground are supposed to be a crucial part of the funding of
the PPP exercise. In your judgement, given the change to London
Underground's financial position that has taken place over the
last two or three years, does it have sufficient operating cash
flows for us, as a Committee, to be confident that it will be
able to service the PPP?
(Mr Colman) I do not think I know the answer to that
question. It is again a question that will take me into the executive
role, which I am very keen not to be taken into.
327. You have talked of subjective factors,
you talked of wider factors, you resisted being drawn into a value
for money assessment; is it the case, and this is a technical
question, I think, that how the value for money assessment comes
out may depend on precisely which group of consultants one chooses
to do it, in other words, different consultants may reach different
results, while being true to their craft?
(Mr Colman) I think it depends what question the consultants
are asked. If the consultants are asked
328. I asked about the value for money
(Mr Colman) No, no; if I may. That if the consultants
are asked, `estimate, please, what this is going to cost, on the
two bases,' I would hope that professional consultants would be
reasonably close on the range in which they were talking. And
if they were not close on the range I hope they would be able
to find out why they differed and what assumptions they differed
on, and someone could take a view about those assumptions. On
the wider issues of value for money, I actually do not think that
anyone should rely on consultants; those are absolutely decisions
for the executive, in this case the Board of London Transport
and the Department. It is their responsibility to decide what
they want to do and how to justify it.
329. So, unless the assessment is done by the
National Audit Office, it will have an element of subjectivity
(Mr Colman) Well, I am. . .
330. I was being slightly facetious. Can I ask
you one final point. You do not want to do a value for money assessment,
but you have used the words `financial analysis' and you are prepared
to offer a financial analysis. Do you think it will be appropriate
for the Government to go ahead only after they have had an updated
financial analysis from you?
(Mr Colman) I think the normal practice would be for
a financial analysis to be done by, in this case, London Transport
and their advisers and the Department; we would not expect to
intervene. We have made our views very clear on how the analysis
should be done, and we understand that our views are accepted.
331. Affordability; how far should that be taken
into account when you are judging value for money?
(Mr Colman) If I may say so, Mr Bennett, that is absolutely
the crucial point; it is far more important than financial analysis
of costs. The absolute question is what standard of underground
system can be afforded; there is then a subsidiary question of
how to finance and manage the transition from what we have now
to that system. Affordability is essential.
332. But if we are looking at a very lengthy
period, 20 to 30 years, I could buy three refrigerators, all at
the cheapest end of the market, and that would be poor value for
money, for me, but it would be what I could afford in each step.
Now how does the Government, or how do people, make a judgement
here, to judge whether they should do it well, to start with,
even if it costs a bit more money, which would be better value
(Mr Colman) This is a point on which the NAO has a
very long-standing and clear line. We expect Departments to take
a whole-life view on value for money, we do not expect people
to compromise now, because they are a bit short this month, but
to take a long view. And by affordability, I mean affordability
in total over the whole life of the project, not what can be afforded
this week or this month.
333. So you do not expect Treasury's short-term
sticky fingers to be involved in the negotiations?
(Mr Colman) I used to work in the Treasury, and I
am well aware of the competing considerations that Treasury officials
have to bear in mind, and no doubt that will continue to be so.
334. Lastly, you have been sucked into this
process; do you think, in two to three years' time, you will be
in a position to comment on this fiasco?
(Mr Colman) I am not sure I accept the word fiasco,
necessarily; but it is our practice to report on deals after they
have been signed. We have not yet returned, but will, to deals
after they have been operational for some years, just to see how
they are going. In this particular case, it is more complicated,
because the deal will be done by London Transport, and we are
not the auditors of London Transport, but we probably would want
to have a look at it in a few years' time.
335. And is your gut feeling that it will not
be a fiasco?
(Mr Colman) I do not think I can answer that question.
336. Mr Colman, I am going to let you escape
in a minute, but you did not actually give us an example of another
Public Private Partnership; you thought about it, when you were
asked a question, are you aware of any other Public Private Partnership
or any PFI that has similar difficulties?
(Mr Colman) Similar uncertainties.
(Mr Colman) I am going to turn slightly towards Mr
Manning, who has not said anything yet.
338. Could we be boring and ask for a specific
(Mr Colman) The current crop; the Channel Tunnel Rail
Link is, of course, a major project with huge uncertainties that
we have already reported on. There is a project under way for
the Ministry of Defence main building, that in a sense is simple,
it is just a building, but that, too, has a lot of uncertainties
about the costs. Almost any of the big projects have these uncertainties.
(Mr Manning) There is one aspect of this scheme which
is, I think, quite different, which is that the capital spending
profile goes on for an awfully long time. In most PFIs, at least
you are able to look at the capital spend over relatively short
periods, so your major uncertainty is often to do with the revenue
stream beyond the original capital spend; in this case, you have
got uncertainties both in the revenue streams and also in the
capital spend into the future, so it is, I think, on the very
edge of the complex and difficult to analyse.
339. And would it be true to say that many of
the schemes you have talked about would have a large amount of
their capital spend front-loaded?
(Mr Manning) Yes.
340. And that is a very, very vital difference?
(Mr Manning) It is a significant difference.
(Mr Colman) If I may say so, one of the crucial differences,
in this case, is that these issues of how the project is to be
financed are much less significant; the amount of money to be
spent year by year under the PPP is not very different from the
amount of money year by year on the public sector alternative.
And so, supposing the public sector alternative were followed
as the project, there would not be a need to raise an enormous
amount of money at the start, there would be a need to find an
enormous amount of money every year, but that is a rather different
Chairman: Mr Colman, I just want to put on the
record my appreciation of your appearance here this afternoon,
with your colleagues, but I also want to say to you that I believe
that you are being asked to confront a series of difficult questions
that have not confronted the National Audit Office before, but
Parliament gains enormously from the fact that you have been prepared
to take on this task and to look at it and to understand the complexities.
I am sorry if we try to pin you down for opinions when the one
thing you do not want to be held responsible for is opinions,
but I should only say to you, in concluding, really, that this
Parliament would benefit from an extension of the work that you
have done from access to the information that you have given us
up front, as opposed to after the deed is completed. And I am
really extremely grateful to you and to your companions.