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

Examination of Witness (Questions 560-579)



Chris Grayling

  560. Can I start by taking you back to the issue of best value. There have been a lot of conflicting reports and a lot of contributions from the different consulting firms on this.
  (Mr Byers) It certainly has been best value for them, I think.

  561. Absolutely. From the position you are now in, do you remain very optimistic that it will be demonstrated that PPP represents best value? If it does not, what happens then? Will you hand London Underground over in its current form to Transport for London?
  (Mr Byers) I am going to wait and see what the advice is and what the detailed contracts are which are finally negotiated. I think it would be premature to say the three contracts are going to achieve value for money, it is going to be a tough test as far as I am concerned. The preferred bidders should not take it for granted that they are going to be successful. We are going to look at this very, very carefully and then make a decision which is in the public interest, and as proper contingency planning we will make sure there are alternatives in place if these do not achieve value for money.

  562. What would Plan B be?
  (Mr Byers) We are working on it at the moment and we have time available to us, but between now and the middle of January or thereabouts, perhaps February when the final decisions are taken, we will need to make sure there are alternatives available.

  563. Is handing it over to Transport for London one of those options?
  (Mr Byers) Certainly keeping it in the public sector and handing it over to Transport for London will be one of the options we are considering.

  564. We heard a few minutes ago that during the bidding process London Underground asked the bidders to reschedule the works for financial reasons which were set out in their bids. Was that decision taken entirely within London Underground or did either your Department or the Treasury have any involvement in the request to restructure the bids?
  (Mr Byers) The position has been we have been at arm's length from the negotiations. The negotiations rightly have been conducted by London Underground. I have made it very clear that I want London Underground to secure the best possible deal for the travelling public and for the taxpayer. That does mean I think there have been changes, there have been greater demands being made on the preferred bidders as a result of the strengthening of our negotiating position because it has to achieve value for money, and we are go back to that point. If the preferred bidders felt they were getting an easy ride they probably would not have satisfied the value for money test. Our position has been strengthened, there are some things which perhaps some people would have liked which I have ruled out. If I can give the Committee one example, I am very keen, bearing in mind advice from the Public Accounts Committee of this House, that in an arrangement like this of a public private partnership if there is any possibility of a refinancing deal taking place, in other words perhaps taking advantage of lower interest rates—because we know in earlier public finance initiatives under the previous administration very often they could be renegotiated and the benefit of that would all go to the private sector bidder, and the public sector and the Government did not benefit at all—the benefits of that have to be split half with the taxpayer and half with the private sector, which is the right way to do it. It is a tough negotiation but we have to get the best possible deal for the public sector.

  565. May I put one specific proposition to you underlying that. It has been suggested to this Committee that the ordering of new trains was pushed back by a number of years for financial reasons and at the request of certainly London Underground and potentially the Treasury or the Department. Did that happen?
  (Mr Byers) It has certainly not been at the request of the Department or the Treasury. I think we need to wait and see the details of the contracts which are finally negotiated. My own view is that rolling stock is an important part of modernising the tube but as are signalling and the track. It is a question of making sure that we put in place measures which will see for the investment which is being made the quickest improvement in the Underground. I think we need to wait to see the detail of the contracts once they are negotiated but it has been London Underground who have led the negotiations.

  566. A final point relates to the quality of the assets, the quality of the knowledge about the assets. We have heard a lot about the issue of asset quality on the main railway network, given the process you are going through now are you satisfied that enough information exists about the quality of the assets to put fairly firm figures on costs in the future? If it proves to be the case that information is not adequate, given what you told us a moment ago that the contractors hold liability, if that is the case, do we risk a repeat of contractors being deluged by overruns of costs?
  (Mr Byers) I will need to refer to the evidence given by Derek Smith on behalf of London Underground to the Committee on 21 November when he made the position, and he is the one who knows the asset register, very clear. He said, "It means we know about the vast majority of our assets, and we certainly know about our track, our tunnels, our signals . . . and so on, because we can see all of those and we can inspect them and we know their condition.". Then Mr Bennett asked, "And do you know, you have got it written down and recorded, their condition?" Mr Smith said, "We have, indeed  . . ." and put into categories. So London Underground clearly do feel they have a proper asset register, and they are the ones who should know.

Mr Stevenson

  567. Secretary of State, according to the Best and Final Offer bids of May this year, 30 per cent of the funding over the first 7½ years is to come from fare box revenue operating surpluses. The operating loss projected for this year is £122 million. How will the 30 per cent be achieved?
  (Mr Byers) As I understand it, the operating costs for this year are inflated mainly because of a change in the accountancy procedures; the way they have reordered their accounts. There is also a deficit this year, partly because of additional staff and additional drivers who are being taken on by London Underground, and I certainly welcome the fact they are recruiting more drivers and more staff for the Underground. In terms of what will be achieved in the first 7½ years, although the Best and Final Offer bids were submitted a few months ago, we will have to wait and see what the final negotiated contracts are like because there has been a fair bit of movement as far as they are concerned. The important thing for me is we have given a very clear undertaking there will be significant sums of taxpayers' money going into London Underground and we do not expect to see a large increase in fares to pay for the investment that will be taking place. That is not part of the formula, not part of the equation, as far as the Government is concerned.

  568. I will come to public subsidy in a moment, if Mrs Dunwoody allows me, but are you saying therefore the main reason for the £122 million operating loss is the reordering of accounts and more drivers, both of which presumably must have been known were going to happen when the Best and Final Offers were made? Secondly, I was interested in your comment, "We will have to see what the final contracts are" because I think I quote you correctly when you said "There has been a fair bit of movement". Are you in a position to give us some idea of what that fair bit of movement has been?
  (Mr Byers) Negotiations are still going on and they are about to be concluded, as I understand it. As I think I mentioned earlier, in reply to Mr Grayling, we are trying to drive as hard a bargain as we possibly can. I know there have been all sorts of allegations about the contracts being soft as far as the private sector is concerned, and I think when people see the details of the contracts it will be useful to compare some remarks which have been made on the record about what people feel will be in the contracts with what materialises when they are published in January. That will be the acid test. I am not being disrespectful to the Committee, I cannot as I sit here today tell you what the details are.

  569. I understand that. My next question is based on what we know rather than what may come out, and what we know is when the PPP was developed the operating surplus forecast was for £419 million and rising. There is a loss of £122 million this year. If my arithmetic is correct, we are talking about £612 million if we add those two figures together. I am advised the change in the accounting regime explains about £150 million of that gap, so that still leaves well in excess of £400 million at odds with the initial calculations. Would you (a) agree with that rough arithmetic in general terms and (b), I still put the question to you, where is the money going to come from?
  (Mr Byers) You are absolutely right in saying as a result of the accountancy changes, to bring the accounts in line with the 1999 Financial Report and Standard 15, which I know the Committee is fully apprised of, it required a change in the way in which investment was defined and that meant a £150 million difference. Mr Stevenson is absolutely right in saying that. In terms of the other aspects, there are a variety of factors: an increase in payments under the existing PFI contracts; increased spending on maintenance and renewal in an effort to make the assets more reliable; the cost of extra drivers and station staff, recruited to run extra services and improve reliability. Those have been the main factors which have led to the costs being increased. Moving forward in terms of the modernisation plans, these are all issues which will be and can be accommodated within the negotiations which are going on at the moment with the preferred bidders.

  570. Yes. You have said you are determined that any requirements because of shortfalls which may occur will not come out of the fare box, and you indicated that public subsidy would have to be considered in those circumstances. Are you saying therefore, Secretary of State, that the Government will make good these shortfalls and, if so, for how long?
  (Mr Byers) What I am saying is that within the finance we are committing to the modernisation of the London Underground we should be able to accommodation this situation. We are not building into it the need to increase the revenue from the fare box, for example, by a significant amount. We are talking within our plans of increases at around the rate of inflation and no more. When people can see the proposals we are able to negotiate with the preferred bidders then they will recognise what we are looking at here is for the first time, and we are going to do it in four batches of 7½ years, a significant increase in the investment going into London Underground.

  571. In the context of your answer, when the PPP was developed, the original forecast was for £490 million surplus and increasing, you say you recalculated that, or words to that effect, what figure are you building into your forecasts now other than the £490 million surplus?
  (Mr Byers) Figure in relation to?

  572. In relation to the £490 million surplus which was built into the original PPP deal.
  (Mr Byers) That is information which one or two gentlemen who might now be sitting behind me would find it extremely useful to have. Sorry. We have to wait a month or two when we have the contracts and people can see exactly what we have been able to negotiate.

Mr O'Brien

  573. Secretary of State, in your opening remarks you gave a catalogue of amazing delays and how the people of London and people who use the Underground have suffered because of lack of investment over a period of time. It has been suggested that there would be a 15 per cent increase in capacity with the investments and with the contracts you have referred to, it was suggested that would be achievable in 20 years. You have moved the goalposts to 30 years, why is that?
  (Mr Byers) The period of the modernisation plans will run for 30 years. The initial £13 billion we are committing is for the first 15 years and within that we are looking at 7½ year contractual periods when, after 7½ years, there can be a periodic review. The reason why we have gone for 7½ years is we think that that is short enough to give us a degree of flexibility but also long enough to allow people, including the infrastructure companies, to plan for the longer term. The idea of having four 7½ year periods we felt would be able to secure greater value for money as far as the taxpayer is concerned. It also means managing the assets for that length of period, because what we are looking at here is the private sector, the infrastructure companies, taking on responsibility for managing those assets not for just a short period of time but probably for the whole life of that particular asset, and so 30 years, on the basis of advice we have received, seemed to be the appropriate length of time, both in terms of the assets being managed and also in terms of a long-term period by which we can see dramatic improvements in the quality of service being offered on the London Underground.

  574. Is the inference in the reply there, Secretary of State, that we have difficulties in establishing a PPP which will deliver what we are looking for, that is the increase in capacity to help reduce over-crowding, to help reduce delays, to help reduce cancellations? Is the fact the 20 years that was suggested in the first instance by London Underground has now been extended to 30 years because of the fact the PPP cannot deliver?
  (Mr Byers) We will need to see in January or February whether it does deliver better value for money. I have always been very clear, since I took over responsibility for transport in June, as far as our modernisation plans were concerned, there should be no privatisation, no compromise on safety, and it will be the Health and Safety Executive which decides finally, and on value for money we will have a debate about whether value for money is achieved. What we are able to do within the agreements which have been negotiated—and people will be able to see what can be achieved within 15 years and not the 20 or even the 30—we will be looking very closely at what can be achieved within 15 years as far as the improvements are concerned. When people can see the contracts, can see the details, and there will be great detail about what will be achieved and the timescale under which the improvements will be delivered, I think many people will be quite surprised at the benefits and the scale of the benefits which will come about. What I would say is they should not really be too surprised because during the period—certainly at one stage during the first 7½ year period—there will be something like getting on (and this is an estimate) for half a million pounds a day being spent on each of the tube lines by way of investment. This is a huge scale of investment which potentially we are going to see going into London Underground. That will bring benefits, it will bring benefits in terms of reliability, better rolling stock, improved signalling, improved tracks, and that will mean capacity will be increased, there will be more trains running and that will enable more people to be carried through the system. I know some people say, "Why are you bothering about changes to tube stations", but I think many of us who use the Underground—and I use it when I come down from my constituency in the North East as indeed Mr O'Brien might at King's Cross—know that King's Cross for two times during the day is actually closed because of capacity restraints, and then we come down to Victoria and we have the same problem at Victoria Station because it is closed because so many people want to get on the platforms. So we have to improve the stations just to be able to improve capacity. I think when people can see it in the round, they will recognise that actually capacity improvements is going to be one of the key objectives we will be able to achieve.

  575. Are you suggesting then, Secretary of State, that the 15 per cent increase in capacity is not sufficient to meet the shortfall in the needs of the travelling public now, and the increase that will generate new customers on the Underground, and therefore when we talk of 15 per cent are we providing sufficient to take up what we are short of now to increase demand?
  (Mr Byers) As most people who travel on the Underground know, it is not just actually at peak hours there is over-crowding. You can be travelling at the weekend and trains during the day are often very over-crowded, and indeed during the summertime, during not what would be regarded as the normal peak, the trains are very over-crowded, so there is a real issue of over-crowding which has to be dealt with and the increased capacity will go some way towards meeting that. We have got enough capacity as a result of the modernisation programme to overcome some of those difficulties—not all of them, it is still going to be the case that during peak hours there will be people standing and it will not be the perfect system we would all want to see. As the Committee will know there has been a drop in ridership since 11 September, which is affecting London as indeed other major cities, but that should not be a long-term trend and we should see passenger numbers increase again. Part of it is due to economic prosperity and the economy growing and that will have an impact as well but we do need to plan for increased capacity.

  576. Are you going to lift your sights from 15 per cent to 20 per cent, 25 per cent, over the 30 years?
  (Mr Byers) One of the advantages of the 30 year programme is to have flexibility to meet new demands as they arise, and if the demands are increasing there will be the flexibility within the programme, within the modernisation plans, to meet increased capacity demands.

Mr Donohoe

  577. If I can take you back to the beginning and your statement when you were talking about cancellations and delays, signalling and everything else, you gave it in a broad brush approach, you did not give any impression there was a breakdown in these figures. Have you got any information to suggest what it is in various sectors within London Underground, what the efficiencies are?
  (Mr Byers) By "sectors" do you mean individual lines?

  578. Let us take, for instance, the Jubilee Line. Do you have any information that suggests that the Jubilee Line is far more efficient? Is it any different from the others? I travel on the Underground and I have to tell you the Jubilee Line is filthy, there are delays on it, there are problems on it which are no different from any other part of the system, and yet it is almost brand new, the investment in it was enormous, and it does not give me any confidence to suggest that there is going to be at any time in the future any improvement.
  (Mr Byers) I think the Jubilee Line Extension is a very good example of where projects managed in the old way can go wrong. There was a 56 per cent cost over-run on the Jubilee Line Extension. I think we all know there are big problems with signalling on the Jubilee Line, which may well be part of the problem Mr Donohoe has referred to, and I know London Underground do keep records by line, and I am sure they will share them with the Committee. There have been improvements. I use the Northern Line and the Northern Line has improved dramatically in the last four to five years because of the way investment has taken place there. The lines do vary. We must always be vigilant, London Underground certainly, to identify the reasons why a particular line has particular problems.

  579. Do you see the improvement being general in terms of the PPP being introduced into the full system?
  (Mr Byers) The phasing of the improvements will vary depending on the individual contracts and on the particular lines which the bidders have responsibility for. I am particularly keen that when the details of the contracts can be announced, we will have the detail line by line about the improvements that will be available and also a timescale put to them, which we can then hold the preferred bidders to. I think the public will want to know what the improvements are going to be and what it is going to mean for their own particular tube station and their own particular tube line, so I am very keen, and I have been saying this to London Underground, to get the details of the improvements so the public can actually see in a tangible form the benefits which will be delivered through the modernisation plan.

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