Examination of Witness (Questions 341-372)|
WEDNESDAY 28 NOVEMBER 2001
341. Good afternoon. I do apologise for keeping
you waiting. I am afraid, when we are enjoying ourselves time
passes very quickly. Can I welcome you and ask you to tell us
who you are?
(Mr Kerr) Yes. I am Michael Kerr. I am a partner in
the firm of Deloitte & Touche, and I had assignment responsibility
for completing the report on the value for money assessment, on
behalf of Transport for London.
342. Did you have any comments you wanted to
make on your report, Mr Kerr, before you started?
(Mr Kerr) I think I would like just to ensure that
the status of our involvement in the project is clear. We are
neither supporters nor detractors from the LUL PPP project, but
we were asked to undertake a specific piece of work to assist
the input of Transport for London in their statutory right
on consultation on the evaluation of the bids. We were asked to
do two things; that was to comment on whether or not, at that
stage, value for money was proven, and to comment on whether proceeding
at that stage to the appointment of preferred bidders was safe.
And those are the two things that we have looked at in as much
detail as we were allowed at that time.
343. Yes. You do say, there is no evidence that
the assessment of the bids will be able to establish whether the
PPP will deliver value for money?
(Mr Kerr) Yes.
344. Do you think that is the case?
(Mr Kerr) Yes. We came to a very clear conclusion
that there were two bases of assessment of value for money, as
you are probably aware, one was looking at a 30-year period; in
the case of the 30-year period, comparing the public sector comparator
for 30 years with bids for 30 years. First of all, of course,
there were the normal uncertainties in a 30-year public sector
comparator, which Mr Colman has alluded to, but, much more particularly,
we did not have any kind of contractual commitments to measure
against that from the bidders; the only contractual commitment
they were going to give was for the first seven and a half years,
and the costs thereafter were to be actually renegotiated, through
the review procedure, in circumstances where LUL, or its successor,
would be dealing with, effectively, a monopoly supplier. And we
felt that, looking at the 30-year comparison, there was no basis
for being satisfied that value for money was proven. With regard
to the seven and a half year analysis, there was no seven and
a half year public sector comparator; we tested this with London
Underground, we tested this with PricewaterhouseCoopers; ultimately,
they produced for us a schedule which purported to be a public
sector comparator for seven and a half years, but in later discussions,
and, in fact, discussions which were subsequent to the production
of our report, they confirmed that that was not a valid comparison.
345. Not a valid comparison?
(Mr Kerr) That is correct.
346. And you were not convinced by their figures
(Mr Kerr) We were not. We agreed with them that it
was not a valid comparison.
Chairman: I see.
347. I was going to ask another question, but
I will ask a follow-on to that. Why, in your judgement, did they
produce it for you in the first place?
(Mr Kerr) In fairness, it was probably to try to be
helpful. We were seeking some guidance as to how a seven and a
half year comparison might be made; it was clear, from the papers
we had seen produced to the London Transport Board, that they
had not seen a seven and a half year comparison at that stage.
The people at PricewaterhouseCoopers, with whom we had very short
meetings, explained to us that they had, nevertheless, carried
out an estimate of this, and we then pressed them and reviewed
their estimate, we were not persuaded by it, and in due course
they confirmed to us that they did not believe it was a valid
348. You describe, in your Executive Summary,
in the report, the public sector comparator as being judgmental,
volatile, or statistically simplistic. Have you discussed these
findings with PricewaterhouseCoopers?
(Mr Kerr) Sadly, PricewaterhouseCoopers were not available
for us to discuss our conclusions at that stage; that was partly,
I am sure, due to time constraints.
349. Have those time constraints been overcome?
(Mr Kerr) They have not sought to discuss those comments
with us since, but as, again, you may be aware, they have published
on the London Underground website a line-by-line commentary on
our report, and part of their commentary relates to that.
350. Yes, they have been critical of some aspects
of your report?
(Mr Kerr) Yes, I think that would be a fair interpretation.
351. But they are not prepared to discuss it
with you; is that fair?
(Mr Kerr) We have not requested, since the production
of our report, a meeting with PricewaterhouseCoopers to discuss
that conclusion, and they have not requested a meeting with us
to discuss it.
352. The Department, the Government Department
(Mr Kerr) Neither have they.
353. Have you made any requests to them to discuss
(Mr Kerr) We are not really in a position to do that,
because we do not have any particular position in this inquiry.
354. I see. You also say that the statistical
analysis, at least, some of the statistical analysis, is arbitrary
and could be misinterpreted by the reader. Would you like just
to expand on that, slightly, Mr Kerr?
(Mr Kerr) Yes; and some of this is rather complex,
but if I give you a couple of examples.
355. Keep it as simple as possible, please?
(Mr Kerr) In a number of instances, the public sector
comparator has been adjusted; let me just find the notes which
will help me with this. So, initially, the process was that London
Underground, assisted by their consultants, Ove Arup, in this
case, made estimates of the future costs of certain aspects of
the investment, so if we take capital expenditure as being one
of those; they then looked at things like how much uncertainty
there might be associated with those costs, those estimates of
costs. When they did that, they said, `well, what is our expectation
of how far out this cost will be,' then they said, `just how far
out could it be,' and then `how little out could it be,' so you
had, first of all, an expectation of how poor the estimate would
be, then something which was a greater mis-estimate, and something
which was a lesser mis-estimate. And the difference between the
lesser estimate and the greater estimate was in each case a different
divergence. What was then undertaken was a very simple form of
statistical analysis, which was to assume that between the outliers,
which were different points away from the central position, there
was a particular form of probability distribution, so that if
you took something which was 80 per cent higher than the central
case there was a very specific probability that the mis-estimate
would lie at that point. They used what is called the triangular
distribution; we have seen nothing whatsoever which would suggest
that a triangular distribution would be a proper representation
of the statistical probability of the outlier being there. That
is the first thing. The second thing is that, as a result of doing
that, a mean value of the mis-estimate is calculated, and that
mean value is not the same as the most likely value, which is,
in fact, greater than that. Now the reader of the report is only
able to see the mean value, and therefore assumes, in my view,
unless he has more information available to him, that the mis-estimate
will be greater than the experts who had judged the mis-estimate
believed it would be.
356. On a table of one to ten, where would you
rank the seriousness of that situation you have just described?
(Mr Kerr) I think it is important to understand the
value of the adjustments we are talking about; we are looking
here at a public sector comparator which had a net present value
of around about, I am sorry, I do not believe I am able to disclose
that in public, but this is a proportion of more than 10 per cent
of the value of the public sector comparator.
357. My last question is about the robustness
of your report, because you do say, in your covering letter to
Transport for London, "In the circumstances, you should
not rely on our work and our report as being comprehensive, as
we may not have become aware of all the facts or information that
you regard as relevant." Now that seems to me to be a pretty
heavy qualification about the robustness of your report?
(Mr Kerr) And, indeed, we were very disappointed to
have to make that qualification, but the circumstances were that
we had great difficulty in getting the information that we required.
358. Yes, but you see the point I am getting
at; whether you were able to get the information you required
or not, that is a fact as far as you are concerned. It is probably
a rhetorical question, this, but just how robust is your report
to people like ourselves, lay people, in this field? There is
a heavy qualification there that effectively says, `be careful
when you're reading this, because we really can't substantiate
what we are saying'?
(Mr Kerr) There are aspects of the report, I will
give one of them, which relate, for instance, to things like the
potential for double counting, in looking at how far out the estimates
could be. I believe that our report is not fully robust in that
kind of area because we have not had access to all of the detailed
papers, nor have we been able to interview the people who have
made the estimates. In other areas, and the first two parts of
this discussion are relevant to that, I think our report is extremely
robust. I do not believe that we would need to see further papers
to be satisfied that there was not, at the time that we undertook
our review, a valid basis for confirming that there was value
359. But then you are not saying that that in
any way means that you resile from your assessment of the methodology
that you laid out before, all the sort of Groucho Marx theory
of assessment that you have told us about?
(Mr Kerr) That is correct.
360. Just one question. You probably heard one
witness who gave us evidence, Mr Kiley, say there was an omission
of public policy; in the eventuality that one of the contracting
companies was to go bust during the life of the contract, it would
have serious repercussions not just for Transport for London
but for the Government as well. Have you formed a view on that
omission and what the potential implications for the whole structure
(Mr Kerr) The first thing is that that was not something
which was the subject of our detailed review, but in the course
of the work that I undertake on a day-to-day basis, which is largely
advising Government Departments on PPP contracts, I would say
it is outside of my experience, for there not to be a contractual
provision for dealing with a failure by a contractor. And I am
not sure that Mr Kiley was correctly interpreted when he made
that comment. I believe he was describing a comparison with a
provision in the Railways Act for, effectively, voluntary termination
by the public sector of the contract, which does not exist in
the LUL contract.
361. It may be helpful if I just put the form
of words that I put to him, which was the answer that he was responding
to that question. I asked him what, in his view, would be the
likely scenario with the potential loss to either Transport for
London or the taxpayer, should one of the contracting companies
go bust during the life of the contract, and it was in response
to that question that he gave the answer. So are you saying that
there is no wish, that there is a structure (inaudibleand
design in there ?) for one of the contractors going bust, or not?
(Mr Kerr) The situation I believe to be the case,
but I have to confess I am not an expert on whether it is the
case, is that there is no provision for termination at will by
the public sector of this contract, unlike the position with Railtrack;
but I expect that there will be a position whereby, in the event
that one of the contractors fails financially, there will be termination
provisions which provide for a certain amount of compensation
to be paid, one way or the other.
362. And who do you think will pay that compensation?
(Mr Kerr) In most PPP contracts, the expectation is
that there will be compensation payable to the contractor, because
the assets have been paid for by the contractor and will become
the property of the public sector; but I cannot claim to be an
expert on this contract.
363. As you are aware, the people of London,
and the people of London will be with me on it, are crying out
for the system to be modernised, to be renewed in many instances,
and that there is an urgency about this. How do you see this coming
about, in view of your report, that the PPP is not successful
and that the LUL without additional powers will not be successful;
how do you see the way forward with the modernisation, improvement
of London Underground?
(Mr Kerr) I think my insights into that will simply
be as a member of the public, rather than in any capacity of the
work that I have undertaken for Transport for London.
364. So is it PPP, or do we need to take on
board the London Underground Limited and give more powers? Mr
Kiley was saying that they would prefer more powers to carry out
their responsibilities; as a member of the public, as you say,
which would you favour?
(Mr Kerr) As a member of the public, I would favour
365. We are the politicians, Mr Kerr, we are
(Mr Kerr) I will give you a straight answer to the
question, which is that I believe that it would be better to have
either a public sector solution to this, with proper management,
in the way that Mr Kiley described, or some form of privatisation;
and I have not heard any proposals for a form of privatisation
which I think would be successful.
366. The Public Private Partnership is something
that has been tested and tried, in other areas; why do you think
it would not work in London?
(Mr Kerr) I think there are very major differences
between this Public Private Partnership and the PFI market generally.
The previous witnesses described one or two of those, but the
one which, for me, is very frightening is the hybrid nature of
this one, where there is split responsibility for the success
of the new network between the public sector and the private sector.
367. We were told by the people from the National
Audit Office that they would not be spending any more money annually
on this than they do on some of the other schemes that are in
being; and so if that is the scenario then do you not think that
this would gel like some of the other schemes that are in the
PPP sector, where there is a 17.5 per cent savings and improvement
to the service, for the benefit of the customer?
(Mr Kerr) The major benefits, in my view, that have
accrued from the Private Finance Initiative programme generally,
have been through the benefit of very severe competition and very
strong contractual provisions. My real concern about this one,
in that respect, in terms of providing value for money, is that
the contractual provisions only last for seven and a half years,
and at that stage I do not believe that there is a basis for effective
competition to ensure that, for the remaining period of 22Ö
years, value for money would be achieved.
368. Two quick questions. One is, do you think
that the current situation in the bidding process and the time-frame
that it has taken is affecting value for money?
(Mr Kerr) Yes. I think that, despite assertions to
the contrary, it is too early to have gone to a position where
there is a single bidder, no further competition. I think there
is an awful lot which still has to be agreed in the contractual
matrix, and that seeking to agree that without competition is
inevitably going to prejudice value for money.
369. Can I also ask you, what work did you do,
when you were going through the preparation of this report, on
assessing the quality of information available about the assets,
and therefore the ability actually to take a real judgement on
what it is actually going to cost?
(Mr Kerr) I am afraid that did not form part of the
scope of our engagement, so we did no work on that.
370. Very quickly. In December 1999, the Deputy
Prime Minister said that the Underground PPP would save £4.5
billion; that is not a claim that has been repeated. Do you consider
you have therefore won the argument on this?
(Mr Kerr) We are not seeking to win any particular
argument on this. The figures that I have seen have not suggested
a value for money difference of that order.
371. You recognise the figure though?
(Mr Kerr) From press reports, but not from the numbers
that I have seen in the course of our engagement.
372. So where did the figure come from?
(Mr Kerr) I am afraid I am not privy to that.
Dr Pugh: A fertile imagination.
Chairman: Mr Kerr, thank you very much, you
have been very helpful, and I think it is very useful evidence.