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

Examination of Witnesses (Questions 20 - 39)



  20. Two more questions. In the four areas you identified in your opening statement, which I made note of, you talked about the issues and the fact that the PPP remains to be tested in practice and so on, and the guidelines and confines in which you were working. Why is it that it appears that the inclusion of social costs is outwith Treasury guidance?
  (Mr Middleton) We have to be clear on this. It is outwith Treasury guidance in terms of developing public sector comparator and value for money analysis. As the guidance stands just now, it is within Treasury guidance on cost benefit analysis and project appraisal within the public sector.

  21. Was not your brief, forgive me, Mr Middleton, a value for money assessment? Right. So, it is outwith, your brief—value for money assessment?
  (Mr Middleton) No, I think it is within our brief because it is included as part of the value for money assessment on this particular project. Again, our view was very clearly that the results of the analysis should be presented with and without that adjustment.

  22. If the inclusion of social costs is beyond Treasury guidance, why did you decide to include them?
  (Mr Joyce) We did not decide to include it, it was included by London Underground in its assessment, and we have commented on its inclusion in our report. With regard to the point you made, whether it is within or without the value for money assessment, in our experience, as Mr Middleton said, we have not seen it included in a financial comparison before in other PFI or PPP projects. However, a simple financial comparison of cost would not necessarily be comparing the cost of delivering the same level of output. You have two options then: either compare the two in a qualitative way, and say, "I know I have a difference here, but I know I am paying different levels of output", or you would attempt to quantify that difference, and that is what the social cost adjustment does.

  23. I am hypothesising a little bit, if I might, but if London Underground had not included this element, which was outwith the Treasury guidance in your brief, would you have included it?
  (Mr Middleton) I think, Mr Stevenson, the reference to our brief—I am not sure that is the correct reference because our brief was to look at the value for money assessment as produced by London Underground, so it was within their value for money assessment, so therefore it was within our brief.

  24. Yes, I understand that, but I was attempting to press you a little further, using your professional expertise as to whether you fake, never mind about your brief, the inclusion of such dramatic costs, as professionals. Given that there is no other example of this happening, is it appropriate, in your professional point of view?
  (Mr Middleton) What we have said in our report, really to build on the point Mr Joyce has just made: it is normal to deal with these social costs as wider factors and often not to quantify them. What London Underground have done is attempt to quantify those benefits. I think we conclude in our report that that was helpful to the analysis in order to promote clarity on the points we have set out in our report, the value for money comparison with and without the adjustment.

  Chris Grayling: Can we be clear on one point on this: you say that London Underground provided the social cost assessments within the work that they had done, but you have not done any work to validate that work, to see whether they have picked the right figures for assessment—

  Chairman: You were not asked to do that, were you? I think, Mr Blaiklock, we would like to have your comments.

Mr Stevenson

  25. Social cost benefit, to what extent is the inclusion of such benefits justifiable in this exercise, would you say?
  (Mr Blaiklock) Social cost benefit analysis would be a component of, you might say, project feasibility work. I cannot recall seeing an occasion where it has been used to evaluate bids. I have worked in the public sector, development banking sector, and I have been in this business for 20-25 years, and I have never seen it used as an evaluation criterion by World Bank or European Bank or any such institution. Another feature which I should mention is that for any kind of these public bidding processes, they should be open and transparent and one should lay down the evaluation criteria before you start. I am not sure whether this has been done on this occasion.

  26. Could I follow that up briefly as a lay person: if it is right to include these social cost benefits, why is it not appropriate to include other social cost benefits that I can think of as a lay person, for example: the expenditure of some of this money on buses instead of the underground? Why just end it at social cost benefit? Why not take the principle to its logical conclusion?
  (Mr Blaiklock) I think you have answered the question yourself. I have not seen it included before in a bid evaluation process for the reason that it is very difficult to identify the data and the assumptions.


  27. Are we clear where this evaluation came from in the first place? You were saying, Mr Blaiklock, you have never seen it before, and we are not clear whether it was actually—
  (Mr Blaiklock) Not in bid evaluation. I have obviously seen it in project feasibilty—

  28. I understand that, but it is bids we are talking about for the moment. Are we clear whether there was any footnote to explain why this particular change has been made in this bid? No. Mr Middleton, you wanted to comment on that?
  (Mr Middleton) Yes. I think this really is one for London Underground to substantiate more fully. The rationale for the inclusion of the adjustment in this case is that there were different levels of performance assumed for the public sector comparator and for the PPP proposals, and the adjustment was essentially there to create a level playing field between the two.

  Andrew Bennett: Or to get the result that somebody wanted.

  Chairman: It could also be one of those complicated bits of—

  Mr Stevenson: 14 per cent difference, a level playing field?

  Chairman: Mr Middleton does not have to defend it, because it was not his idea in the first place.

Mr Donohoe

  29. On page 14 of your own report, you say: "We have reviewed the basis on which the seven and a half year comparisons have been made and believe that they are useful in the value for money analysis, but, as with the 30 year comparisons, retain sufficient reliance and subjective adjustment to prevent them from being clear detriments of the value for money." Given this uncertainty, and it is definitely an uncertainty, what criteria did you use to decide how important the 30 year analysis was in the overall assessment of the value for money?
  (Mr Middleton) Firstly, in answering that question, I think we recognised, in the same ways that you recognised in your recent report, that a value for money assessment report is essentially a subjective process. I do not think we came to a conclusion that the seven and a half year or the 30 year analyses were better or worse than one another. Our view is that the seven and a half year analysis informs decision making, the 30 year analysis informs decision making, and that they should be viewed in conjunction with the wider, non financial issues, not that one single piece of analysis should be used to found the whole decision making process.

  30. You note that the commercial leverage that London Underground can apply as their viewpoints is potentially limited, due to the costs of unwinding the position—that is on page 5 of your report—and that, "This places great emphasis on the arbiter acting efficiently." You also say: "The arbiter has a duty to balance potentially mutually incompatible positions of the Infraco and London Underground." Would it be fair to say, in these circumstances, that the Infraco is the box seat in this relationship?
  (Mr Middleton) I would not put it quite as bluntly as that.


  31. Would you actually disagree that it gives enormous power to Infraco at that point?
  (Mr Middleton) The Infraco is entering into a contract which sets out the rules of the arbiter quite clearly, and the efficiency of the workings of the arbiter will clearly have an impact on the overall value for money. I think, at the end of the day, as Mr Donohoe has pointed out, the cost of unwinding the position, should agreement not be reached, would be something that both sides of the negotiation would be aware of, and the arbiter would be aware of, and you would expect, in a logical world, for the Infraco to capture some of those costs for itself because clearly the LUL will not want to unwind the relationship if it can avoid doing so.

  Mr Donohoe: Do you think this is a logical world?


  32. Are you not really saying, in a rather longer way—forgive me, Mr Middleton—"Yes, that is right, they are in the driving seat"?
  (Mr Joyce) As we said in our report, it places more reliance on the role and operation of the arbiter.

  33. You are saying that if the arbiter plays according to the rules, then it ought to be all right, but it is very likely that the Infraco will be in a very powerful position because of the complicated machinery that would need to operate to dissolve anything at that point; is that what you are saying?
  (Mr Middleton) I think, Madam Chair, you are perhaps overstating the balance of power towards Infraco because what you have in this project is something which sits somewhere between a PFI project and a regulated utility.

  34. Something between chaos and disaster.
  (Mr Middleton) So the rule of the arbiter is directly comparable to that of a regulator in the electricity or telecoms industry, and the balance of power, if you like, is balanced by that. That is the intention.

Mr Donohoe

  35. Mr Blaiklock, do you believe that London Underground retains sufficient leverage at this seven and a half period for the review?
  (Mr Blaiklock) I am not sure who will have leverage. I think there will be a contractual mess. You have firm prices for seven and a half years and uncertainty after that. I think, therefore, that the whole process is a little bit flawed. I think, in the analysis, from what I have seen, and the whole costs of unwinding the financial position and the contractual position have been underestimated significantly. I know that you have 3,000-page interlocking concession documents of which bankers will be relying upon for their security. You are now raising the suggestion that those commercial contracts will be unwound and some new ones will be put in place. You first of all have to find new companies who will take upon themselves the contractual responsibilities of those that have been there before, as well as bankers who will be happy with that situation as well. It is going to be a field day for lawyers and advisors; I think it is an unsatisfactory way of proceeding.

  36. Do you accept then, that the comparison with a regulator is rather spurious?
  (Mr Blaiklock) It is an unusual role, I think, for a regulator to take. I cannot recall seeing a similar situation anywhere.

  37. By comparison to a regulator, the arbiter has very, very weak powers. There is no comparison, is there?
  (Mr Blaiklock) As I understand it, an arbiter normally has no authority really to say who does what, but on this occasion, he probably might have. It is a little bit ill-defined.

  38. So do we need a regulator?
  (Mr Blaiklock) I am not sure. We are into unchartered territory here because I do not know another situation where you have this kind of possibility arising.

Miss McIntosh

  39. Just before we leave the role of the arbiter, could I just ask a supplement to Mr Donohoe's question: would it be within the arbiter's power to approve an interim review by one of the operating companies?
  (Mr Middleton) The arbiter's position: he is a statutory arbiter, so he is a creature of statute, and his or her roles and responsibilities are defined. Within the contractual framework, there are a series of caps, essentially, where the PPP bidders have agreed either £50 million or £200 million as their respective caps on changes before which they have recourse to the arbiter. Once they have reached those caps, and can demonstrate to the arbiters and London Underground that they have reached those caps, then a case can be made to the arbiter for an extraordinary review ahead of the seven and a half year reviews.

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