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

Examination of Witnesses (Questions 40 - 59)



  40. And could that be blocked by anybody?
  (Mr Middleton) I do not know the answer to that question. My understanding of the contracts is it should be a matter of fact.

  41. Assuming that the contracts are a matter of fact, as part of your report, did you look at the situation of what would happen if one of the contracting companies went bust during the life of the contract?
  (Mr Middleton) It was outside our remit.

  42. The costs of the public sector option are expressed with a range to reflect uncertainty, which I think is generally agreed upon. However, in your Memoranda of Evidence, you state: "The comparison of a PSC with a wide range in values with a single point estimate of a PPP is difficult." When you say difficult, are you saying there is uncertainty over the costs of the PPP over 30 years and that this has not been shown?
  (Mr Middleton) Yes, exactly that point.

  43. In noting that it is difficult, do you not think it should be better to estimate the variation of PPP costs objectively, and that there should be a wider factor in the equation.
  (Mr Middleton) The rationale which we were given by London Underground for it being a single point, was that if the PPP costs changed, there would be a balancing change in the public sector comparator. If you assume that mirroring of changes is correct, then there is a logic to having a single point PPP estimate. We questioned that logic, and I think what we have said in our report is that we do not fully buy into that, but actually making estimates of what the variation to the PPP price might have been would have been a hugely subjective exercise. We recommended that the decision makers treat this, again, as an intangible issue rather than a financial issue when they were making the decision. So yes, we did recommend more clarity around that point.

  44. One last question: would you say that the impact of the seven and a half year reviews and any extraordinary reviews are critical to the actual PPP costs?
  (Mr Middleton) Yes, we do agree with that. Again, we made recommendations around ensuring that the bids from PPP contractors, at the outset and subsequent to any reviews, are actually treated as a starting point for making a case for an extraordinary review, or making a case for changing the price at the periodic review.

Mrs Ellman

  45. To Ernst & Young, you say in your report that the ability of the PPP is: to deliver value for money and risk transfer—depends on the robustness of the contract structure; the ability to operate the contract effectively; and the cooperation of all partners. Would you put those three characteristics under the heading of the subjective analysis that you told us at the beginning was part of your report?
  (Mr Middleton) Yes.

  46. If you are agreed, then, that those parts are subjective analysis, rather than objectively proven, how sure are you in your final judgment?
  (Mr Middleton) Again, it was a bit outside our brief to make a final judgment on that point.

  47. How sure are you that your conclusions are right, that these key elements are purely subjective?
  (Mr Middleton) What we sought to do was to satisfy ourselves, and not being lawyers, we sought to satisfy ourselves in commercial terms that the key issues had been identified and dealt with within the contracts. What you have in this PPP, which is unprecedented in any PFI or PPP project is the period of shadow running, where the contracts have been in place with the internal Infracos for in excess of 18 months now, and have been constantly refined and updated to ensure that they do work. That, as we said in our report, should give some comfort that the contracts are reasonably robust. In the real world, when there is a commercial test of those contracts, they remain unproven. As with any contract and any contractual relationship, unless the counterparties are willing participants to that contract, then yes, there is opportunity for the contracts not to work as effectively and for value for money to be impacted upon by that.

  48. But in such a key area, which really goes to the heart of all the judgments, are you really equating 18 months' shadow running with 30 years of a real contract in real, commercial circumstances?
  (Mr Middleton) No, we are not, and we did not say so in our report. We recognise the difference.

  49. Does that mean that your conclusions in your report are not very robust when we relate that to 30 years running of unprecedented contracts?
  (Mr Middleton) Not at all. All we said in our report is, you have had 18 months of shadow running, the contracts have been refined, most of the commercial issues appear to have been covered off—actually, it is one of those situations where you will not be able to answer the question you are posing until the contracts have been tested and practised.

  50. But what does that say for the strength of your report? You have identified these three key areas in the operational contract; you have told me that it is subjective judgment; you have now confirmed it would not be possible to assess that properly, apart from waiting 30 years to see what happens: what implication does that have on the conclusions of your report?
  (Mr Middleton) I think in terms of our report we were very, very clear. We set out very clearly that these contracts were untested commercially. That is absolutely the same position anyone is in when they enter into any contract. I think that is fact and practice. The situation here, you have had 18 months of shadow running, which is unprecedented, in our experience, in any PPP, PFI, or actually most commercial situations—I cannot think of many commercial situations where you have had the 18 months of shadow running before a contract is actually signed.

  51. You do keep emphasising, as other witnesses have, this whole contractual structure is unique. Are you really saying that nobody should use your report to conclude that the PPP is value for money?
  (Mr Middleton) Again, if I could be clear, our report and our commission was not to answer the question you have just posed. What I would say is that this issue, as a wider issue, is highlighted in our report.

  52. Your report should not be used to establish that the PPP, as put forward, is value for money?
  (Mr Middleton) Our report was to reach conclusions on the overall methodology which was adopted by London Underground in developing the value for money analysis.

  53. So your report is not about judging whether the PPP will deliver value for money, compared with other alternatives which you told us at the beginning you were not asked to look at?
  (Mr Middleton) That is right. Our report was solely to look at the value for money analysis and the comparisons between the public sector comparator developed by London Underground and the PPP bids.

  54. But it could not be used to assess the real life situation continuing for 30 years?
  (Mr Middleton) I am in danger of repeating myself, but we looked at the commercial—


  55. Mr Middleton, I think we are in some difficulty. First of all, you start off by saying, "These are the four areas which have an element of subjective judgment". We are not seeking to make things difficult for you, we are just trying to work out exactly where the problems lie.

  In simple terms, you looked at the "robustness", that is the word that has been used "of the methodology". So you are not drawing conclusions yourself, you are not putting in your own particular views, although you have put in, if I may say so, a number of subjective judgments, or accepted other people's subjective judgements. I do not say that judgmentally; you have said that yourself. What we want to know is how narrow was your interpretation of your role? Are you saying, in effect: "We looked at whether their figures stood up". Is that what you are saying to us? "Given these areas of subjective input, we looked at whether their figures could be regarded as robust"? Not illuminative, not worth money, not to clear, just robust?
  (Mr Middleton) Yes, and we looked more widely at the contracts and we raised the issue about the contracts and the robustness of the contracts as an intangible issue, and we set that out very clearly in our report, so the decision makers have to be aware of the issues being raised.

Mrs Ellman

  56. Thank you. Mr Blaiklock, would you like to comment on the significance of these uncertainties and how—
  (Mr Blaiklock) I think that any bid evaluation should primarily be focused on factual information, in other words, actual facts and objective data and objective results. That is the first starting point. Then you have a number of obviously subjective features that may be added. One has to agree those and everybody has their own opinion. In this particular case, on an objective basis, from what I have seen, then the two options are very much probably in the balance. It is only when you start looking at the subjective assumptions that the balance swings in favour of the PPP. On the other hand, I would also argue that the PPP option has had a number of costs which have not necessarily been included, and, therefore, if it had been a really thorough analysis, on an objective basis—


  57. Give us a list of one or two—
  (Mr Blaiklock) I think the overall contractual structure is very complicated. The finance depends upon a concession agreement which is 3000 pages long, and there are three of them, and they are presumably interlocking. Normally, for any form of project financing or PFI type deal, you may get a concession agreement, or the equivalent document, which may be 200 or 300 pages long. When you are dealing with something which is into the thousands, then there is no one person who can actually have their finger on the pulse of everything in that document. Therefore, I can see long periods of argument: how do you actually control it; how do you actually manage it; how do you actually judge performance? It sounds to me, from what I have seen, you are into unchartered territory. I appreciate there has been 18 months of run-in period with a shadow contract, but these are contracts which have not yet been banked. The banks are still looking at this wadge of paper, and they will have their own terms and conditions which they wish to impose. We do not know those yet, and it could be some weeks, or even months, before that happens. So I take with a slight pinch of salt the comment that they have been running for 18 months on a shadow basis.

Andrew Bennett

  58. Are you saying that would have a cost which should have been included?
  (Mr Blaiklock) We talked earlier about the cost of disruption at year seven and half, should things not run as we expect, but also the cost of managing this deal. I recall, at a previous session you had, you asked the question of London Underground what provision had been made with regard to estimating the costs for managing this particular contract, and the answer came, as I understood it, that there had not been provision made. If you have a document which is 3000 pages long, upon which banks are relying for their security, then you are having to make lawyers and bankers out of people whose best skill is running trains on time for the travelling public, and building new projects.

Mrs Ellman

  59. Mr Blaiklock, what you seem to be saying is the subjective factors have been used to go in favour of the PPP; the objective factors go against the PPP. What status would you give this report informing a judgment on whether PPP is value for money in a 30 year real life situation?
  (Mr Blaiklock) To be fair to Ernst & Young, as I understand it, they were being asked to evaluate another consultant or, I am not quite sure whether it is a London Underground report or a Price Waterhouse report, but let us say it is London Underground's evaluation of the proposals put to it. They are being asked to judge on that evaluation process, not, as I understand it, the decision per se.

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