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


Examination of Witnesses (Questions 500-519)

MR ROD HOARE AND MR IAIN COUCHER

WEDNESDAY 5 DECEMBER 2001

  500. The best way of achieving it, not the best way of not achieving it? You cannot by contract not achieve it?
  (Mr Coucher) Correct.

  501. So Mr Kiley is incorrect?
  (Mr Coucher) I think Mr Kiley's comments referred to a fixed contractual obligation to replace a rolling stock fleet with, say, 106 trains. We are free to find the best way of doing that and that may be faster trains but less trains.

  502. You may be free to find the best way of doing it, I understand that as a non-business person, but my question is directed at are you free not to achieve it? Are you contractually obliged to achieve it or not?
  (Mr Coucher) Yes.

  503. So Mr Kiley is not correct?
  (Mr Coucher) I am not sure what Mr Kiley actually said.

  504. I will quote it again. It is all here, so the record is clear, "Infracos are free to depart from asset management plans supplied to London Underground Limited and have no contractual obligation to actually deliver the specific investment suggested by their bids". That is what Mr Kiley said. Is he correct or is he not?
  (Mr Coucher) We have got fixed contractual obligations laid out to deliver the obligations that LUL set for us and we cannot depart from those.

  505. So Mr Kiley is not correct?
  (Mr Hoare) Can I help you just a little because I did sit opposite Mr Kiley for six weeks in negotiations. One of the issues that Mr Kiley had which brought this subject up, I think, was we have to reach a specific output specification for trains and signalling on a new line. Let us take an example. On the Victoria Line we have to provide an output specification which is based on a time base for passenger use and that specification is very clearly laid down and is a contractual specification. To do that we will provide new signalling and also, in this case, 42 trains. Mr Kiley was concerned, when I sat down with him, that over that period what I could do to reach the specification that I could reach was I might refurbish the trains instead of providing new trains, but, in actual fact, when you looked at the specification upgrade I needed to achieve I could not do it by any other means except by providing new trains and new signalling. I think there amounts some confusion.

  506. So if the contract requires for your companies to provide new trains and if during the course of the time period in question your companies feel "wait a minute, hang on, this maybe a bit too expensive, things are getting a little bit out of control. We think we are better off providing refurbished trains", you are free to do that?
  (Mr Hoare) I would not reach, however, the performance specification and in not reaching the performance specification on the year described in the contract I then suffer penalties and the type of penalties I would suffer are in the region of £26 million a year if I do not do that on the Victoria Line.

  507. So you are not free to depart from asset management plans supplied to London Underground?
  (Mr Hoare) In the way I have just described it, no.

  508. In what way are you free to depart from it?
  (Mr Hoare) I think the issue is, as I tried to explain earlier, that I will put forward an asset management plan, we have already put it forward in bids, we put forward an asset management plan each year. I do not think there is anything devious or wrong in this, but having put forward that asset management plan which shows we are going to spend, shall we say, £8 million in the next year on replacing track on the Bakerloo Line, if we then find during the course of the next three months that we have a very, very specific problem on track on the Victoria Line, we may then go to London Underground and say "We were going to put eight million into the Bakerloo Line this year and 12 million next year, what we might do is put seven million this year and 13 million the next year and concentrate the extra money on the problem on the Victoria Line". London Underground can turn round to me and say "No, I do not accept that".

  509. They have a veto?
  (Mr Hoare) They have the right to turn round to me and say "I do not accept it". At the end of the day the responsibility for safety of that track and my responsibility to make it work has got to come back into the Safety Case.

  Chairman: Mr Grayling, we want all Members of the Committee, please, sharp questions and sharp answers.

Chris Grayling

  510. Did you, during this process of putting bids together, as we have heard in evidence from other people, rejig the investment plans so that bigger projects were pushed into later stages of PPP at the suggestion of some or any part of Government?
  (Mr Hoare) I saw this as the normal run of business. What happened was when we put the first bids in, based on the information we had on all the infrastructure, we put a series of bids in front of London Underground and London Underground came back to us and said "Some of this we would like to rejig because it does not fit and we cannot afford it in certain areas". I did not see that as any different from what I have done for 20 years in providing my capital expenditure budget to my board and my board turning round to me and saying "well, actually, you cannot spend that this year on that", so you move it on. I saw it as the normal process.

  Chairman: The answer is yes, Mr Grayling.

Chris Grayling

  511. Was your understanding that decision came from London Underground itself?
  (Mr Hoare) It was certainly London Underground that told us about it and as far as I was concerned it was London Underground.

  512. On the subject of risk, the Government said that you are going to be responsible for all cost over-runs that result from you acting in what they call an "uneconomic or inefficient manner" and they have said "the financial risks associated with force majeure are retained by London Underground". What is your understanding of what force majeure actually means? If you modernise a tunnel and you suddenly discover you need four bolts and not two, is that force majeure?
  (Mr Coucher) We are responsible for our own performance, so any cost over-runs associated with our own, as you say, uneconomic and inefficient performance is our responsibility. The force majeure regime applies to a very small number of things like terrorist acts, flooding, the Thames Barrier breaking, things like that. In your example, if it required four bolts or eight bolts or ten bolts that is our risk.

  513. So if you discover a tunnel that is fundamentally less structurally sound than you believed at the start of the project, that is your problem?
  (Mr Coucher) Yes.

Miss McIntosh

  514. What happens if a company goes bust during the life of the contract for a PPP? Do you believe that a Public Interest Termination clause should be included in PPP contracts?
  (Mr Hoare) Let me answer the first one first. If a company goes bust London Underground will take back the Infraco—

  515. After a very long convoluted procedure.
  (Mr Hoare) It is not that long. It may look convoluted on a piece of paper but it is not that long. I am quite certain in terms of a company going bust that emergency arrangements would be put in place straight away.

  516. By whom?
  (Mr Hoare) By London Underground. The service contract we have is with London Underground and, therefore, I think they will put that into place very quickly. There is a procedure in the contract for doing it. Your second question was?

  517. Should there be a Public Interest Termination clause negotiated in PPP contracts?
  (Mr Hoare) Should there be or should there not be, I personally do not think it is necessary. If you look at the whole series of contracts on the contract map, everything we do is in the public interest. In terms of what we are taking on here, we are taking on a contract for 30 years. There is tremendous flexibility in that contract for London Underground and its owners to come to us and to change it and to do whatever they want. If there is a safety problem there is a very clear, laid down procedure whereby they can come in and claim a safety breach against us on no notice whatsoever. So all the facilities and all the requirements that I would suspect everybody would need on a contract basis is there. A Public Interest Termination does not actually meet what I really think people want in these contract terms.
  (Mr Coucher) I have not much more to add.

Chairman

  518. If you agree with Mr Hoare, perhaps you would not repeat it.
  (Mr Coucher) I do agree but I would like to add that this is a long-term contract. The assets for which we are responsible are long-term assets, lives of 20 years and 40 years. What we also bring is financial stability, long-term financing, which is something which has suffered in the past.

Miss McIntosh

  519. But if your company went bust—
  (Mr Coucher) If it went bust exactly the same regime which Mr Hoare has referred to applies.


 
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