Members present:

Mrs Gwyneth Dunwoody, in the Chair
Andrew F Bennett
Mr Brian H Donohoe
Mrs Louise Ellman
Chris Grayling
Helen Jackson
Miss Anne McIntosh
Mr Bill O'Brien
Dr John Pugh
Mr George Stevenson


Examination of Witness

RT HON STEPHEN BYERS, a Member of the House, Secretary of State for Transport, Local Government and The Regions, examined.


  1. Secretary of State, I apologise for keeping you waiting. It is always in the best theatrical traditions to make your star only appear on cue, so I hope you will forgive us. May I ask you to identify yourself for the record, not that we could not make a guess at who you are.
  2. (Mr Byers) For the convenience of the Committee, I am Stephen Byers, the Secretary of State for Transport, Local Government and The Regions.

  3. Did you want to make a few opening remarks, Secretary of State?
  4. (Mr Byers) If I could, Chairman, just a few opening comments in relation to the inquiry which the Select Committee is presently conducting. I would hope that we could all agree that London Underground is not performing as we would like it. The main reason for this is really decades of chronic under-investment. Amongst other difficulties, in the last full year of 2000-01 we have seen 5.3 per cent of trains cancelled, that has been the highest level for four years and an increase of over half on the previous year, the number of train delays of 15 minutes or more was 12 per cent higher than in the four previous years, and nearly eight per cent of customers buying tickets had to wait for more than three minutes before they could do so. Put simply, the tube does not provide the quality of service that London needs and I, as Secretary of State, want to change that. The problems that passengers experience on a daily basis are a reflection of this historic under-investment. It is essential to secure large scale and sustained funding for the renewal and maintenance of the infrastructure, but I am convinced that it is equally important to change the way maintenance and investment projects are planned and executed otherwise there is a serious risk that new funds will not deliver the improvements that we want to see. I do believe that the Government's modernisation plans are the best way forward. I think there are three main reasons for this. The first is that the plans will secure, at long last, the long-term stable funding that the London Underground needs. It will enable 13 billion of investment and maintenance over the first 15 years of the programme. That is the equivalent of about 4,200 for every household in London. Secondly, there will be fewer delays caused by equipment failures and passengers will notice real improvements in services. The contracts being negotiated are clear about the quality of the overall system that the London Underground needs to run to offer a first class service. The infrastructure companies will have every incentive to deliver a high quality system because they will be paid by results and that, in the end, is what counts. I am not in the business of micro management of the infrastructure companies' work. The performance management system is thorough but, contrary to recent reports, is perfectly workable. The shadow running of these arrangements has been under way for two years and is working well. The third and final reason is that under these plans London Underground will remain in the public sector operating the trains, the tracks, signals and stations, as a public service accountable to the people of London, and this is in no way a privatisation. If I could conclude, Chairman, by just saying a few brief words about value for money and safety, which I know are important to the Committee. As far as value for money is concerned, I understand that the competitions are progressing well. London Underground are finalising the negotiations on the contract terms, ensuring the best possible deal for the public sector. The long stated aim is to conclude the competitions and begin the modernisation and investment at around the end of this financial year. When they receive the final bids London Underground will make their value for money evaluation. Now, of course, I cannot today predict the outcome of this evaluation but I want to give a guarantee to this Committee that the plans will only go ahead if they offer better value for money than the alternatives.

    To advise me on this I have commissioned Ernst and Young to carry out an independent review of value for money and in particular the robustness of London Underground's evaluation. I have also been considering whether, as would normally be the case, to publish after my decision the recommendations and the report from Ernst and Young. I have decided in this particular case to publish Ernst and Young's advice to me in January before a final decision is taken. This will be published at around the same time that London Underground makes its own evaluation publicly available and formally consults the Mayor and Transport for London on the proposed arrangements. It is my intention that Ernst and Young's review for me should be made available to help inform the consultation process itself. It is only after consultation that final decisions will then be taken on value for money. Finally, on safety, this has to be of course the highest priority. There must be no compromise on the safety of passengers and indeed of railway staff themselves. As we have heard, the Health and Safety Executive has this week decided a satisfactory case for safety has been made by London Underground, but that is not the final part of the double safety lock we have put in place. The next stage is for the Health and Safety Executive to consider for acceptance safety issues related to the transfer of the infrastructure companies to the private sector. Our plans will not go ahead unless the Health and Safety Executive is content that there is no reason why these plans will lead to lower safety standards. Indeed, I am determined to ensure safety standards are not just maintained but actually improved. Private investors, as I think you may have heard earlier this afternoon, and the Government are ready to commit serious money to renewing the London Underground. These plans are the best and the quickest way to ensure the money we want to invest delivers better services, and I am confident that this is the way to deliver a tube system which is fit for the 21st century.

  5. That all sounds very encouraging, Secretary of State, and it is nice to know all is well in the garden. Do you accept the evidence which has been presented to this Committee, which I am sure you have been studying, which we have received both from the National Audit Office and from others, that it is extremely difficult to judge value for money unless the parameters in which such decisions are to be made are very clear? It would appear even people like Ernst and Young would normally say that a lot of those parameters are subjective judgments. Is that your view?
  6. (Mr Byers) It is. I think that is the very nature of the public sector comparator, for better or worse a judgment will have to be taken. In this particular case the judgment will have to be taken by London Underground and indeed by myself as Secretary of State. It is one of the reasons why I will be particularly grateful for the views, no doubt, of the Select Committee during the consultation period, because when one has to make a decision like this it is very often helpful to have the views of your Select Committee.

  7. You are by nature a flatterer, Secretary of State.
  8. (Mr Byers) Not always, as you know, Mrs Dunwoody, but on this occasion it makes a lot of sense both in the self-interests of the Secretary of State to have the views of the Select Committee and also to have an effective consultation, because you are absolutely right it will be a subjective judgment. Far better, I think, that we use the consultation period with the advice I will be receiving from Ernst and Young so people can see what that independent advice is saying, we can have a debate about it, we can discuss it, we can look at the issues which have been raised and then eventually I will have to arrive at a decision, but it will be a decision informed by the views of a whole variety of other people and not just by myself.

  9. You would give us in this period in January access to all the assessments which have been made on which you would base that judgment?
  10. (Mr Byers) I am saying this afternoon ----

  11. "We" being the House of Commons, may I say, not the royal we.
  12. (Mr Byers) I would not have taken it any other way, Mrs Dunwoody. The Ernst and Young report I will certainly be more than happy to make available to the Committee as soon as we can publish it, which should be really two or three days after I receive it myself, which will be 10 or 14 January or thereabouts. There will also be the report from Pricewaterhouse Coopers which London Underground will be receiving, and I certainly hope they will make that public. I think it would be sensible for them to do so. It is a decision for London Underground but I will certainly use my best endeavours to make sure they do publish that. Also we should as far as we can within the boundaries of commercial confidentiality publish the details of the contracts so we can all have a proper detailed look at really the whole of these issues because it is a major decision. We are going to be spending 13 billion over 15 years in London Underground and I want people to know that this is not coming out because of some political dogma, it is actually being done because it is the best thing to do.

    Chris Grayling

  13. 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.
  14. (Mr Byers) It certainly has been best value for them, I think.

  15. 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?
  16. (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.

  17. What would Plan B be?
  18. (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.

  19. Is handing it over to Transport for London one of those options?
  20. (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.

  21. 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?
  22. (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.

  23. 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?
  24. (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.

  25. 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?
  26. (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

  27. Secretary of State, according to the Best and Final Offer bids of May this year, 30 per cent of the funding over the first 71/2 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?
  28. (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 71/2 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.

  29. 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?
  30. (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.

  31. 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?
  32. (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.

  33. 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?
  34. (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 71/2 years, a significant increase in the investment going into London Underground.

  35. 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?
  36. (Mr Byers) Figure in relation to?

  37. In relation to the 490 million surplus which was built into the original PPP deal.
  38. (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

  39. 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?
  40. (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 71/2 year contractual periods when, after 71/2 years, there can be a periodic review. The reason why we have gone for 71/2 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 71/2 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.

  41. 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?
  42. (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 71/2 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.

  43. 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?
  44. (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.

  45. Are you going to lift your sights from 15 per cent to 20 per cent, 25 per cent, over the 30 years?
  46. (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

  47. 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?
  48. (Mr Byers) By "sectors" do you mean individual lines?

  49. 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.
  50. (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.

  51. Do you see the improvement being general in terms of the PPP being introduced into the full system?
  52. (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.

  53. No doubt, Secretary of State, you had somebody listen to the evidence of Mr Kiley last week. Why is he so opposed to the concept that you have of the preferred bidder?
  54. (Mr Byers) I think he has a different approach to these major contracts. He has very strong views from his experience in New York that almost the old style works contract is the one he prefers. There are arguments which can be put forward to support that particular approach. I happen to believe it is the sort of approach which led to the problems we saw on the Jubilee Line Extension, and I think there are better ways of approaching these major investment decisions particularly the transfer of risk from the public sector to the private sector, and that is something we intend to achieve through the modernisation proposals.


  55. It is also something we will not be able to judge until we see all the detail. Will it be clear from the contracts, because frankly if there is not to be a transfer of risk - and previous history of other deals has shown the risk has not been taken out of the public sector and loaded on to the private sector - it will be very difficult to justify this entire deal.
  56. (Mr Byers) I think you are right, Mrs Dunwoody, in pointing out that this whole question of risk transfer is one of the key issues that will need to be addressed.

  57. You are satisfied this is going to be the case?
  58. (Mr Byers) Like you, I am waiting to find out.

    Mr Donohoe

  59. Predecessors of yours, Secretary of State, were satisfied that what they were seeing as bids coming from the private sector as far as the operation of the railways was concerned were satisfactory, and look at the mess we have there. If one compares that to what you are proposing, there is not a lot of difference, is there?
  60. (Mr Byers) I think there are differences. I think the acid test is going to be when we have the details of the contracts and when we have all this wonderful advice from the various consultants, then we can have proper consultation and we can make our decisions. I have no doubt this question of risk transfer is going to be at the heart of whether or not value for money is going to be achieved. I have a very robust view about this, I am not quite sure what my predecessors may have thought of it but my view is very clear, if we do not achieve value for money these will not go ahead. It is as simple as that. The whole point of this is that basically we have a once in a generation opportunity to get it right and we are not going to blow it just because for dogmatic reasons some people may think that a PPP is the only way forward for London Underground. It has to achieve value for money and it has to be safe. If it does not deliver on those two then as far as I am concerned it will not proceed.

  61. What happens if one of the bids which have been analysed does not prove value for money?
  62. (Mr Byers) Then we will need to have an alternative which we can put forward. What I do not want to see is further delay.

  63. What alternatives?
  64. (Mr Byers) We are working on those at the moment. They will be worked up in time for the decision to be taken on whether or not the three contracts achieve value for money and we will look at them in the round but we will also look at the contracts individually to see each one of them achieves value for money. I was rather alarmed by Mr Kiley's comment last week when he seemed to imply that you had to look at all three together, because in fact the way the contracts have been drawn up you could arrive at a situation where, for example, two of them were value for money but one of them was not, because they are separate contracts. We will have to look at that and decide accordingly whether that is the case or not. But these are all issues we will need to look at in January and February. We will also need to make sure, as part of good, proper contingency planning, if we decide after the consultation and after the advice that one or all of them is not value for money that we have an alternative to turn to, and that has to be the case. I want to make sure it is an alternative which does not build in a year or two years' further delay. We have to have something where we can move quickly and make sure the investment can continue to go in even under a different model than the present one being considered.


  65. Who finally takes that decision though, Secretary of State? Is it you or is it the Chancellor of the Exchequer?
  66. (Mr Byers) It will be a Government decision.

  67. I realise you are both in the Government. Could we have a little more precise information? Frankly, there is a definite view that the Treasury are having a very important role to play at every level of this. When you say, "It will be value for money", "We will evaluate it", who will finally decide? Will it be you on transport grounds, or will it be the Chancellor of the Exchequer on the grounds of overall public expenditure?
  68. (Mr Byers) The level of public expenditure is such that it is only right and proper that the Treasury will be closely involved, because we are looking at 13 billion ----

  69. Being closely involved and taking the decision are not quite the same thing.
  70. (Mr Byers) The decision, for better or worse, will rest with myself.

  71. Would you like to say that again?
  72. (Mr Byers) Yes. The decision on behalf of the Government will rest with the Secretary of State for Transport, Local Government and the Regions.

  73. With a certain amount of consultation with the Treasury.
  74. (Mr Byers) On behalf of the Government. So we will consult as is appropriate.

    Miss McIntosh

  75. Can I repay the compliment the Secretary of State paid to us at the beginning of the afternoon by saying it is good to talk to the Secretary of State. Can I ask, Secretary of State, what happens if during the life of the PPP contract one of the contracting companies goes bust?
  76. (Mr Byers) There are provisions, in fact they are within the Greater London Authority Act, about the measures which will be put in place if one of the companies goes into insolvency, because what we cannot afford to happen is for the system not to operate. So there are measures which are contained within the legislation which will be implemented.

  77. Are you aware, Secretary of State, that a number of witnesses have said this is a very complex procedure and that the cost, in terms of possible cost to the taxpayer and an ever spiralling subsidy, could be enormous?
  78. (Mr Byers) The cost of?

  79. The protracted negotiations of a company going bust and Transport for London having to come in and take that over? It is a very convoluted process and there will be a cost implication.
  80. (Mr Byers) I would hope that none of the preferred bidders will become insolvent but these things do happen in a commercial and marked-led world. What I think we need to do is to make sure that the procedures are in place to cover that eventuality whilst hoping it does not occur. As I say, the provisions have been laid down very clearly in the Greater London Authority Act.

  81. I do not know if you had the opportunity to see Mr Kiley's evidence last week to us in our evidence session, but he went so far as to say, "I think it is poor public policy" not to have such a procedure. Do you not accept that over the life of a contract, especially one lasting 30 years, something might indeed go wrong and that ultimately a company may be able not to perform and perhaps you should have envisaged that in the contract?
  82. (Mr Byers) I agree, I think there will be appropriate procedures put in place, but I am very mindful that sometimes when proper contingency planning occurs and people do draw up proper procedures ahead of that eventuality, they could be criticised for it by saying they have pre-judged their own decisions. I am sure we all want to make sure in the context of London Underground we will put in place the appropriate procedures as well, because it is proper contingency planning.

  83. I think I understood you to say that this is not privatisation. Is that a yes?
  84. (Mr Byers) Yes, this is certainly not privatisation.

  85. If I was to play back to you something we received in written evidence from Transport for London, they said that insofar as the infrastructure companies maintain long-term control over the Underground infrastructure, coupled with the long-term economic interest in that infrastructure, that effectively vests the infrastructure companies with ownership of the infrastructure over the 30 year term of the contracts, and I put to you, Secretary of State, that to all intents and purposes, all substantive purposes, that is privatisation.
  86. (Mr Byers) No, it is involving the private sector, and I do not have a problem with the private sector being involved provided we do so to achieve the means of improving public services. That is what I believe we will need to see from these negotiated contracts. A number of the critics have said, "This is a Railtrack on the Underground", the important thing to make very clear is that the only shareholders in the London Underground will be the people who buy their ticket to travel the system, and they are the people who have to be the priority. So it is not a privatisation, as some people have said. London Underground is not going to be quoted on the stock market, London Underground is going to continue to be a publicly owned company. They will enter into contracts with the private sector but this is not unusual. For example, if you look at any school building, the school remains in the public sector but it is often built by the private sector. There is not a problem here and I think we have to make a clear distinction between the involvement of the private sector, the private sector working for a publicly controlled London Underground, as opposed to the private sector calling the shots and being able to dictate the priorities, and that is not going to be the case. It is not going to be the private sector accountable to shareholders, but London Underground accountable to the travelling public.

  87. Why is there no right to resume public control of the network if an infrastructure company becomes insolvent?
  88. (Mr Byers) It is laid down in the statute and these were debated in the Greater London Authority Act and the provisions are there and they will be introduced if this happens, but it is a hypothetical situation. I think you are right to point out that we do need to make sure that proper procedures are in place if this ever happens, and I will certainly make sure that will be the case, because it is proper contingency planning, which is what we have to be prepared for.

  89. Would you at any future stage seek a power of direction to intervene were a company, an infrastructure company, be seen to be under-performing in not delivering your test of improving the infrastructure?
  90. (Mr Byers) The prime responsibility has to be with London Underground as the contracting body, and it is very important that they have powers within the contracts they negotiate to move in and terminate contracts if there is under-performance. I think we will see when those contracts are negotiated that such a power will rest with London Underground. I also think it is important, because safety is so significant, that London Underground should have step-in rights if they feel any work is being done which is not up to the appropriate safety standards, they can move in, they can take the company off the job, they can put their own people in to do it properly and they can bill the private sector as a consequence. I think it is important those powers are contained within the contracts as well. This is all part of getting a good deal for the travelling public. Certainly I hope that London Underground will be negotiating such terms and conditions with the preferred bidders.

  91. Finally, would you agree that the key role of the arbiter is to determine contract pricing at the time of the 71/2 year review, and that the ability of the arbiter to perform this function will depend on the quality of the information available and the reference to comparable businesses, and that we are slightly handicapped by the fact there are no comparable businesses and it may well be the infrastructure companies are effectively left with a virtual monopoly which they are free to exploit?
  92. (Mr Byers) I do not think that will be the case. The arbiter is appointed by the Secretary of State as a result of provisions contained within the Act. I have no doubt they will be able to find an effective way of identifying whether or not the infrastructure companies are delivering, and when they come to do the periodic review after 71/2 years, there will be, if we do achieve value for money, if value for money is identified by the three preferred bidders, an element of cross-referencing between those contracts because they will not all be held by the one consortia, so there will be opportunities there. I do think there are ways in which the arbiter will be able to judge whether or not we are getting a good deal as far as the taxpayer is concerned, and also whether or not the infrastructure companies are getting a good deal themselves as well. But that is going to be the challenge for the arbiter. These things are never easy but I do believe within 71/2 years they will be able to identify ways in which they can do it.

    Dr Pugh

  93. Secretary of State, in December 1999 the Deputy Prime Minister stated in the House of Commons that the Underground would save 4.5 billion. You do not believe that, do you?
  94. (Mr Byers) I am sorry, I did not quite catch what you said.

  95. I will say it again. In 1999 the Deputy Prime Minister said in the House of Commons the Underground PPP would save 4.5 billion. I am putting it to you on the basis of what you have just said, you no longer believe that.
  96. (Mr Byers) I do not know the context in which the Deputy Prime Minister said that, so it would probably be inappropriate for me to comment on the specifics, but what I can say to the Committee is that I do not know whether or not these three negotiated contracts are going to be value for money, and I will judge that in January and February.

  97. But in your mind it is possible there may be no savings at all?
  98. (Mr Byers) It is possible they will not offer value for money compared to the public sector alternative, yes.

  99. On the subject of value for money, has your Department quantified a total amount when the exercise is completed which will be spent by public bodies on consultancy and consultant costs?
  100. (Mr Byers) There is not an estimate as we meet tonight on the total cost at the end of the exercise. We do have a figure for the amounts which have been paid so far which I could let the Committee have by way of a written document if I cannot find it immediately. London Transport's current estimates of the final out-turn on consultancies, and this is London Transport, is around 98 million, and for the transition as a whole London Transport forecast a figure of a little over 150 million.

    Dr Pugh: What are your fees likely to be for Ernst and Young?


  101. What do you pay them to tell you what you want to know?
  102. (Mr Byers) That usually comes out a bit more.

    Chairman: I could probably do it cheaper.

    Mr Donohoe: 450 an hour.


  103. This Committee would be delighted to advise you for rather less than that.
  104. (Mr Byers) What figure do you have in mind, Mrs Dunwoody?

    Chairman: 450 an hour.

    Dr Pugh

  105. Can you tell us what Ernst and Young will be charging you?
  106. (Mr Byers) I will certainly provide that information.

  107. On a different area, it has been suggested that one problem dogging the Underground all along has been the lack of consistent investment. Whose fault has that been? Your Department's or the Treasury's?
  108. (Mr Byers) I think successive governments have failed to invest in the Underground. We just need to be very honest about this and just look at the levels of investment. It is an underground system which has suffered from chronic under-investment, and that has happened for such a long period it could even go back to the days when we had a Liberal Government.

    Mr Donohoe

  109. You are going back sometime now!
  110. (Mr Byers) I am going back a long time. We are looking at a Victorian system and we have to go back a long way to find a Liberal Government.

  111. I want to go back to last week's meeting. In last week's meeting it was said that a missing witness here, a clear missing witness, deeply implicated in the whole process of PPP, is the Treasury. Do you think the Treasury should be here as a witness given their involvement in the Underground process?
  112. (Mr Byers) I lead for this on behalf of the Government, so I am more than happy to speak for the Government as far as our modernisation plans for the Underground are concerned. I do speak for the Government, not just my own Department. What I am expressing here about value for money is the view of the Government. Obviously we must consult closely with the Treasury because of the large sums of public money which potentially are going to be invested in London Underground, but I hope I have been able to give you evidence which reflects the position of the Government.

  113. Can I quote from a Parliamentary Answer by your colleague, Andrew Smith. He writes, "Treasury, DTLR and London Underground officials are in regular contact about various aspects of the PPP." We have seen DTLR, we have seen London Underground, why should we not see the Treasury?
  114. (Mr Byers) Because in Government I speak on behalf of the Government on these matters.

  115. But the Treasury presumably has its own point of view?
  116. (Mr Byers) I reflect the Government's point of view, which will obviously involve the views of the Treasury as well.

    Dr Pugh: Is it not an unreasonable view of the Select Committee that to some extent we are wasting our time talking to you ----

    Chairman: I do hope not!

    Dr Pugh

  117. --- when we should have the Treasury?
  118. (Mr Byers) It is the way Government works. A Cabinet Minister is responsible for policy in a particular area and I reflect the views of the Government. What is important is the message I am giving this Committee this evening is that on behalf of the Government it is not just the view of Stephen Byers, Secretary of State, it is the view of the Government that value for money has to be achieved.

    Mrs Ellman

  119. If this system is as you describe it, a private company working for the public sector, why can not London Underground be a company limited by guarantee as you propose for Railtrack?
  120. (Mr Byers) It may not need to be because in fact London Underground at the moment is operating in the public sector. It has the responsibility for putting the interests of the travelling public first, it is not compromised by the need to drive up shareholder value, so in essence some of the benefits which might come from a company limited by guarantee, about just being focused on the needs of the travelling public, about re-investing any operating surplus, are already reflected in the structure that London Underground has got. I do not think we need to change the governance of London Underground in order to put the travelling public first. I think the important thing for me is that the modernisation plans do not compromise the ability of London Underground to operate and control what takes place and do so in a way which puts the interests of the traveller first.

  121. Ernst and Young have said that it might not be possible to have a conclusive assessment of value for money, and the National Audit Office have pointed to subjective factors which have to be considered. In view of that, what factors are you going to bring into play to decide finally whether this is the right scheme?
  122. (Mr Byers) There are a range of factors and I think you are right when you say that unfortunately for all of us it will not be one of those recommendations which says clearly "Yes it is value for money or no it is not". As Mrs Dunwoody said at the beginning, it will involve a subjective element. That makes things difficult for some of us but that is a challenge we will have to rise to. The National Audit Office have said that they now believe London Underground are approaching it in line with the recommendations that the National Audit Office made earlier this year, or last year, in relation to public private partnerships, so it is good they are doing that. In the light of that, the National Audit Office have said they do not feel there is a need to have another report before the contracts are concluded, so we will have to rely on the advice of consultants like Ernst and Young and also make our own judgment. There will be a range of factors we will need to take into account, for example, we will need to look at the way in which the public sector has dealt with these sort of contracts in the past, we will I think need to build in some improvements which are taking place as far as the public sector is concerned, and all of those factors will need to be taken into account when we arrive at our final decision.


  123. Is there going to be a committed stream of funding from the Treasury if you go down the Transport for London route?
  124. (Mr Byers) This is something we are considering as one of the alternatives if there is a need for a Plan B. As I think I mentioned earlier in reply to Mr Grayling, we have not yet arrived at a conclusion.

  125. All of this will be made manifest and transparent when the great New Year dawns?
  126. (Mr Byers) Is that next year you are talking about!

  127. Let me make myself quite clear. You have told us you will give us information in January or thereabouts?
  128. (Mr Byers) I will certainly provide the Committee with the Ernst and Young review which I have requested. Whether or not in January we will be in a position to disclose what an alternative might be, I honestly do not know at this stage, but certainly by the time the decision is taken on value for money, which will probably be the middle of February, we will need to know what an alternative might be.

  129. You are a sharp fellow, would you sign a 30 year contract if you did not know what the cost was going to be for the last 231/2 years?

(Mr Byers) It would depend on the nature of the 71/2 yearly periodic review. That is how I would judge it. It goes to the points Miss McIntosh has made about the role of the arbiter in these things. Given the commitment the Government has made in terms of funding, there is huge potential here, certainly for the private sector to be interested but most importantly for the travelling public in London to see a significant change in the quality of the London Underground, and that has to be our objective. I honestly think we have delayed for far too long this money going in and the time has come now for decisions to be taken, and in the first two months or so of next year these decisions will be taken and then we can get on with investing this money in the London Underground which is so badly needed.

Chairman: Thank you, Secretary of State. I have to say that is the least that the London public deserve. We know you will be keeping us fully informed and, if you are not, then we may have occasion to remind you. Thank you for being so helpful this afternoon.