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

Examination of Witnesses (Questions 140 - 159)



  140. It did not. So the Government suggested that. Thank you very much, Mr Appleton, that is extremely helpful. Could I ask why it was that London Underground included the social cost benefit element in their plans when such element is outwith the Treasury guidelines, in other words, you included something that is not included in the Treasury guidelines? Why did you do that?
  (Mr Appleton) I will let Mr Callaghan answer that in a moment. Let me just say, we always use social benefit, that is how we plan all our investments and historically have always done it like that.
  (Mr Callaghan) Very little to add. The objective we have had since my involvement in the underground which is getting on for 13 years, and my background is originally in the planning of investment projects for the underground, we have always taken the view that the responsibility of a public organisation like ours, which relies very heavily on taxpayers' money is to buy the maximum benefit for the community as a whole. We have a way of calculating that, and that is a social benefit way of doing it. Through the PPP, a great deal of taxpayers' money is going to be invested in the underground, and it seems to us appropriate that in comparing alternative ways of spending that money, we should do it on exactly the same basis, which is a social benefit basis. Added to which, just as a matter of making the relationship work, all the people who have commented, all the commentators on so-called partnering type contracts say that a key element of making a success is that the incentives on each side should be aligned, so we have put a tremendous amount of effort in designing this contract into setting up a situation in which the private sector is rewarded when it does things which are good for customers and is penalised when it does things which are bad for customers, which is what our motivation is to.

  141. So you say this is your normal practice, although you confirm it is outwith Treasury guidelines. But Ernst & Young have said in their report they are not aware of any previous PPPor PFI projects where such adjustments have ever been made.
  (Mr Callaghan) Let me say, first of all, they also said that what we have done is sensible guidance to decision makers in their report.


  142. I think they said the figures were robust. That is not quite the same thing.
  (Mr Callaghan) They said specifically, I believe, in relation to this particular point about using social benefit, that it was a sensible way of proceeding.

Mr Stevenson

  143. Do you know what the rate of return the banks are requiring out of all this?
  (Mr Callaghan) Yes, we do.

  144. What is it?
  (Mr Poulter) Are you asking for the interest rate on the bank's loans?

  145. Rate of return. I, simply, as a lay person, question that.
  (Mr Poulter) It is around 1.5 per cent over LIBOR.

  146. I do not know what that tells me.
  (Mr Poulter) LIBOR is currently 4 per cent, and if you want to fix it over a long period, it is slightly higher than that.

  147. I see.
  (Mr Poulter) If you choose to hedge the debt over a long period, then it is. That is a matter partly for them.

  148. My final question is to Mr Poulter, as it happens. Would you confirm that PricewaterhouseCoopers are auditors to Bechtel Incorportated (Tube Lines), to Halcrow (Tube Lines), to WS Atkins plc (Metronet), and to RWE, the parent company of Thames Water (Metronet)?
  (Mr Poulter) I can certainly confirm three of the four, the second I am not sure about.

  149. Would you find out and let us know, please?
  (Mr Poulter) Certainly.

  Mr Stevenson: Thank you.

Mr Donohoe

  150. Is it true that the PPP will save £2 billion over the 15 years?
  (Mr Callaghan) The only way in which you can describe a saving is by comparing what it is actually going to cost the PPP to do PPP with what it would cost to do in the public sector. As our report says, and almost everybody who comments on this says, there are many ways of doing that calculation because it is a matter of judgment. But yes, our view is that it will make substantial savings over what it would cost to do in the public sector.

  151. But you do not give a different answer, and yet you have spent £128 million of what I presume is public money trying to analyse whether or not this is best value?
  (Mr Appleton) Not just to do the analysis. That is the bill to develop the PPP over four years.


  152. It is still a valid question. Is it going to save £2 billion. Surely somewhere in your £128 million, someone gave you a little inkling for your £128 million?
  (Mr Callaghan) I am happy to answer your question which is on all the analysis we have done, which is set out extremely comprehensively in our report. It suggests that, not only is it the right thing to do on what are called the wider factors, policy factors, it is also going to save money, on any reasonable assessment, on what it would cost to do the same job in the public sector. It also says in our report, and as we have been advised by the National Audit Office, it is unwise to assume that it is possible to calculate a single estimate of what it would cost in the public sector. Therefore, we have not done it, we have shown all our estimates as a range. Therefore, the answer to "Is it different by some given number", is not a question that we can answer because you can only look at it in terms of the range.

Mr Donohoe

  153. But if I take, what is a quote from the House of Commons, from the Department, of 7 February, the benefits of proceeding with the tube modernisation contracts are considerable: "Over the first 15 years of the contract, London Underground will save £2 billion compared with traditional public funding." Where did that figure come from? Was it not from you?
  (Mr Callaghan) It is one of the figures that you could draw out of the analysis that we have done.

  154. But surely, this is extremely disturbing, because one of the ways this was sold by Government was on the basis that it was going to be far better value for money than any of the equivalents that were being considered, including the bonds(?). But yet, you are now saying that you cannot put definite figures on it, it is only estimations. Therefore, knowing anything about estimates, it is possible that that figure will be just a surreal figure, and that indeed it could be quite wrong. There are arguments around, are there not, that suggest that over the 30 years, this is going to be more expensive than some of the alternatives?
  (Mr Callaghan) If you look at our analysis, and what I can do is refer you to the analysis because it is quite clear from that analysis, we show our estimate of what it would cost to deliver the performance delivered by the PPP in the public sector as a range. In the great majority of cases, the private sector, the PPP costs come out at the bottom of, or below the bottom of, that range. And from that point of view, provided that you know that it is cheaper than any plausible estimate of what it would cost to do in the public sector, you can say with confidence that it is going to be better value for money than doing it in the public sector. What our report says, and what a number of other reports have is there are many possible calculations of that sort, and on all the calculations we have done, what I have said remains true.

  155. The worrying aspect is that these reports, and having worked with consultants over a great number of years, you say the parameters: they go and do the work and then report to you, and the problem I have in this respect is that the parameters were set too close together, and that there was not, as terms of reference, the ability of any of the consultants to be able to go and look at the alternatives in a meaningful way because they were restricted to suggest, as most people do when they have consultants, that the best and the only way forward was to go for the PPP.
  (Mr Callaghan) I reject that completely.


  156. What is interesting to me, Mr Callaghan, and I am a very simple person, is since you really cannot control what happens after seven and a half years, and since you have not got a termination clause in this particular contract, which is extremely unusual for public sector contracts—in fact, I think it is probably unique, how on earth can you estimate accurately the prices after the seven and a half years?
  (Mr Callaghan) You used two words there, Chairman, one is "estimate" and the other one is "accurately". You can estimate it and we have estimated it. Everybody acknowledges that it is very difficult to estimate with precision in 30 years' time. That is as true of what it will cost to deliver this work in the public sector as it is about what it is going to cost to deliver this work in the private sector. So doing the calculation is a matter of judgment which is something that we have acknowledged all along. The fact that it is a matter of judgment, and the fact that there is this seven and a half year review process makes it less straightforward to do, but does not make the analysis by any means impossible—

  157. So why have you not got, in this contract, a way of getting out of it? There is no termination clause; why is that?
  (Mr Callaghan) It is not quite true to say there is no termination clause. What—and I forget who I was answering, it might have been Dr Pugh on this subject—we can terminate this contract if the private sector does not perform it satisfactorily. If they do perform it satisfactorily, there is no reason for us to terminate it, so there is no right of termination when the private sector are doing well.

Andrew Bennett

  158. How much will it actually cost to manage this contract?
  (Mr Godier) This question was asked at the last hearing and we did provide a note subsequent to the last hearing about the costs of contract management—

  159. You did not provide that to Ernst & Young, did you, so that was not part of their study?
  (Mr Godier) It was covered in both Ernst & Young and a number of other commentators in the sense that in the public sector, there would be costs of administering contracts, indeed far more contracts, because we would be doing all of the work with individual piecemeal contracts in the way we have done in the past. So it is not the question of all the contract management costs apply when we have the whole of the works of the underground supplied by two people, and then there would be none if we did it in the public sector. There would be costs either way. We provided an estimate of about £600,000 per year for managing the contract—

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Prepared 24 October 2002