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

Examination of Witness (Questions 186 - 199)




  186. Good evening, you are most welcome here. Would you be kind enough to tell us who you are?
  (Mr Kiley) I will, Chairman. Thank you for the invitation. My name is Bob Kiley and I am the Commissioner for Transport in London.

  187. Thank you very much. Did you have something you wanted to say, Mr Kiley?
  (Mr Kiley) I will say something very brief, if I may, Chair. I know the clock is running down here. I think we should probably get back to the basics at this point, having sat through the last hour and a half with some fairly arcane conversation coming from this table. Essentially, I think the Underground, when it responded as to who started all this, said their problem was they could not really deal with the infastructure because there was insufficient funds, so you have infastructure decay on the one side, and inadequate funding on the other side. Now, where are we at this stage, four years into this procurement? We have a programme reflected in this most recent set of what are now called "final documents" that has changed very dramatically, especially in the last six months. Essentially, what we have ended up with at this point is a maintenance scheme, and the capital improvement programme, the renewal programme, has almost disappeared. So one of the reasons why the Underground was interested in this, and may have been coaxed or teased into it, seems to be going off the charts, at least for the next seven and a half years, which is the whole renewal programme. The second question has to do with money, and I guess there is not anyone in the room right now who is in a position to know whether there will in fact be a commitment. We do know there have been conversations going on between DTLR and the Underground, having to do with the next spending review period, and that those conversations undoubtedly reflect joined up Government thinking about what will happen to the Underground. So we must be very close to knowing what the initial projections are. My suspicions are that there are people alive and living in this town or near it who actually do know what those numbers are, so I think we should all persist in trying to find that out. Finally, I might say that the undergirding tenet of Government financing has seemed always to be the transfer of risk to the private companies that will assume ownership of the Infracos at some point in the not too distant future if PPP continues to be pushed. That risk transfer has also gone the same route of the capital renewal programme: it has all but disappeared. On the one hand—this is the tender that started all this. There is a provision in here which says that if there are any cost overruns for the life of this programme—30 years—all that exposure will be on the backs of the infastructure companies or the private contractors. About a year ago, that was changed, and for the seven and a half year period that we are talking about, the cap was put at £200 million. That is a pretty significant sum, but it is nothing like unlimited exposure, which would have represented genuine transfer of risk. In the most recent round of documents, that £200 million figure has been reduced to £50 million or roughly £7 million per year, and £7 million per year in a £1 billion programme is almost inconsequential. Risk gone? Risk, where is it? You are looking at him. So that is the very raison d'être this programme has essentially gone south on us, and most of it has happened in the last six to ten months. The original purposes have basically been abandoned, so, in effect, we have ended up with a glorified maintenance programme and what I would call a "set of cost plus contracts". Cost plus contracts, that is a bad term, unless you are going to war or a national emergency of some other kind that has occurred that causes you to resort to almost desperation circumstances, which is to pay contractors almost anything they submit to you in the way of an invoice to fix the problem. I would submit that while the situation is not what we would like it to be at the London Underground, we are not facing a force majeur, and we are not in those circumstances. We have come to a pretty sorry pass at this point. This procurement has absolutely changed from the day that this document was distributed. So I would be very happy to answer any questions. I guess I should add, I am bound to add, that once again, we have had problems getting documentation from the Underground, supporting materials for the assessment report that they were discussing earlier. And to this day, we are in day 14 now of 20 working days of consultation, and we still do not have complete documentation. The question was asked here about the rate of returns, and especially the return on equity. Well, knowing what the return on equity is, and we should be able to know that if these are final prices, almost everything else you try to do in terms of value for money is for nought, it is theoretical and truth. So our position is that consultation has not begun because we do not have adequate documentation to do it with, and if in fact that documentation was not available at the time that the London Transport Board took its decision and made its recommendations to the Secretary of State, and then the Secretary of State made his decision, they were really working on a basis of inadequate information. We understand that negotiations are still going on with the bidders, and that is probably a mistake, to continue negotiating with the bidders after a set of recommendations has been made. So this is a very constrained consultation process that we are going through right now. We are probably going to be arguing one day soon that it is no consultation process at all and that the clock should be rewound and perhaps some of the decisions that have been taken dissolved.

  188. Could I ask you, do you have the faintest idea of what the criteria is being used now to judge this PPP, since it manifestly is not the document you started off with, and since—I suppose I am right in assuming that you have not managed to talk directly with anybody from the Treasury?

  (Mr Kiley) You are correct.

  189. I do not know how I guessed that. And there have been these enormous changes, and you heard from London Underground how great a role faith is playing in these negotiations. Could you tell us: what kind of criteria do you think are actually being used to judge this PPP?
  (Mr Kiley) I think that there is four years of commitment from those who are sponsoring this procurement. A fair amount of resource has been invested in this, well over £100 million. Four years is a long time, and I think the central criterion that now seems to be in play is, "Let's just get it over with", and "We have the power to push it through". I do not think it is a lot more sophisticated than that. It has been a long time since I have heard a ringing defence of PPP other than the mantra that £16 billion or resource will be unlocked. All of it, by the way, eventually will be public money because these are loans or investments that all must be repaid, or on which there must be a return, so this is not exactly manna from heaven; this will all come out of the taxpayer or the farepayers' pocket. As to the question of whether there is a guarantee involved here: what my colleagues from LT and the Underground neglected to mention is that there is an LT guarantee of the Underground. That gets transferred to Transport for London at the time of transfer and takes on a wholly different significance, because Transport for London is a very different body than LT was. LT is basically a creature of the Central Government. TFL is, in effect, a creature of the Greater London Authority. So that guarantee will be transferred, and the question of the comfort letter really is one of whether or not the Government will be in the queue. It will be at the end of the queue, but will it be in the queue at all? I submit that no serious banking concern is going to get into this, unless there is, in effect, a Government assurance that they will not be left high and dry under any circumstances.

Mr Stevenson

  190. Mr Kiley, you say it is a long time since you have heard anyone present a defence of the PPP, but one of the defences or rationales put forward in support of the PPP is that—we have heard this before, have we not—there is no alternative. Indeed, I understand the Secretary of State has actually said as much. He is on record as saying, "If we do not go ahead with this PPP, we could look forward to yet more delay while different plans are prepared and a new procurement exercise put in place." Do you accept that argument, that there is not any alternatives and, even if there are, the delays would be disastrous for London Underground?
  (Mr Kiley) I do not accept that argument at all. I never have. As a matter of fact, I think if we transfer the London Underground without PPP to TFL now, we would be in a position to produce very visible improvements sooner than PPP will. After all, the private companies have not really mobilised themselves yet; they do not have the people who are going to be doing the work on their payrolls—the payrolls actually do not exist, except for the small group of people who are negotiating these contracts. They are going to have to get their acts together. Do not be lulled into thinking that these consortia are anything other than paper organisations right now consisting of individual companies of some strength, but who will be the people who will be mobilised? Who will be the CEO of tube lines? Is it the person who just replaced the CEO who left two months ago to go to work at Railtrack? He must have considered that a step up, otherwise, why would he have done it? And who is going to be the CEO of Metronet? If the current CEO is successful in getting new employment—I know he is looking for work because he actually interviewed for a position where I have some knowledge of who the candidates are. So let us make no mistake about what it is we are dealing with over here: on our side, we have commitments from four banks that they are prepared to underwrite in successive tranches over a period of seven and a half years upwards of 3 billion of loans, and we will be able to get to the capital markets within three to six months of the starting point and we will be able to begin procurement processes for both new rolling stock and refurbishment processes for rolling stock that can still be fixed and have their natural life extended very substantially within that three to six month period. So we will be in a position where we will have new rolling stock and completely refurbished, not cosmetically refurbished, but thoroughly refurbished rolling stock coming into the system within the next two years, and my commitment would be that the entire train fleet will be replaced or refurbished within seven and a half years. That is exactly what was done in New York with a fleet that is twice the size of London, and that is what we are going to do here. PPP will have 12 trains in the system by the end of seven and a half years.

  191. So there is no ambiguity about this, because you appreciated, by the tone of your answer that this is a crucial issue, you are saying that if your scheme, Transport for London, were given approval next week, within two years, all that could be done, and there would be no problem with the finances. You have talked about refurbishment of rolling stock. What about refurbishment of infastructure and stations and so on?
  (Mr Kiley) Well, it is true that there are crucial stations that need attention, but stations in the early going would receive a lower priority than getting at the line upgrades and the replenishment of the fleet, because, I think what our customers are going to be mainly concerned about is improving the reliability and the quality of the actual service that they use, and they will endure the stations and experiences on the platforms in order to get that because there is not enough money to do all these things at once, you have to determine some priority. Having said that, PPP, in this tender, originally, by the end of the first period, most of the lines were to be to the 20 per cent upgrade mark. What do we have on our hands right now? Nine of the twelve lines will get no upgrade activity at all in the first seven and a half years. One line will get a 15 per cent upgrade, that is the Jubilee line, and then Waterloo & City, and—I forget what the third line is—will get very, very modest improvements, and the Jubilee line improvement is in the last year of the seven and a half year period.

  192. Mr Kiley, because I have interpreted your answer as effectively saying that infastructure, in the sense of stations and so on, would be given a low priority, ergo later on, perhaps after seven years, are you not, therefore, running the risk of facing the same criticism, if you like, of what is happening at the moment in the evidence we have heard this afternoon, of similar infastructure projects being pushed back, post seven and a half years, because of financial considerations?
  (Mr Kiley) No, I simply said let us assume we had the capital renewal envelope of somewhere in the neighbourhood of £600 million, this is putting aside the maintenance, that will buy a lot of activity over the next seven and a half years. It will buy an entirely new or refurbished train fleet, 3,200 cars; it will get a start on half a dozen upgrades that will have to continue into the second period, because these really do take time; we are talking here about roadbed, track, signals and major work being done. It will not all be the same kind of work because some lines are in relatively good condition and will not require as much effort in the immediate future. Other lines require a great deal of effort and they require it very soon.

  193. Two further questions, correct me if I am wrong: have your plans, as you briefly outlined to us this afternoon, Mr Kiley, been subjected to any outside analysis?
  (Mr Kiley) Such as, say, Ernst & Young, or—

  194. I use the term "outside analysis" advisedly. Perhaps I could think of another word to use. Has any other organisation, not connected with Transport for London, made any critical assessment at all of your plans?
  (Mr Kiley) Well, we have distributed a major document which is really a summary of our plan, it is not 3,000 pages long, it is much shorter than that, and we have been in consultation with the banks that I mentioned to you that are committed to raising upwards of £3 billion and they have taken a very careful look at this programme as to financial feasibility and whether or not we will be able to deliver the competence on the staff side to actually carry the programme forward.

  195. And those banks have produced their analysis, have they?
  (Mr Kiley) They have not produced to me an analysis, all they have done is made a commitment in the form of a letter to finance the scheme.

  196. This is the point I am getting at. This is a complicated issue, it does not matter which way it is done, it is certainly complicated. I think it is reasonable to ask yourself and your organisation this question. You say this can be done; you say, "Go ahead", and within two years this will be done and that will be done and so on, and the banks are committed to you, you say. But by definition, that is your analysis of what can take place and, to add the "robustness", using that word, would you not agree that some other organisation should be scrutinising your proposal, your assumptions—
  (Mr Kiley) Any other organisation is welcome to come in and look at—

  197. But, as yet, that has not been done?
  (Mr Kiley) We are all prisoners of our own experience, in a sense. In New York and in Boston where programmes of at least this magnitude were launched, we did not really get into complicated long processes leading to four year—


  198. We are not asking whether you spent £128 million on advisors, you are just telling us, very simply, you have had to make a business case to the banks, they have looked at your figures and they have accepted?
  (Mr Kiley) Yes, and people are welcome to come and look at—

Mr Stevenson

  199. Finally, you mention £3 billion. We are talking here about investment or anticipated investment of what, £15 billion over the period? How do you equate the two?
  (Mr Kiley) That is a very interesting question because I think there is frequently misunderstanding of what it is that lies at the heart of PPP. Originally, this was a scheme that envisaged both major capital renewal and the Infracos doing all of the maintenance work of the London Underground. So when people talk about pricing that, they are talking about one price covering both of those activities. We would separate out the maintenance. We would bring the maintenance back into a unitary management structure, which I think is one of the most fundamental flaws in this scheme, the fact that it is separated out. When you take out the maintenance, let us just say arbitrarily that you cut the amount of money in half, so the £ billion number that has been thrown around somewhat loosely I think, probably comes down to around £600 million for the capital renewal programme. So the amount of money that we are talking about, which would be focused on capital renewal, is less than the amount of money that would be embedded in the combination of the maintenance work and the renewal. It is not very well delineated in the contract documents, because it is in the nature of these documents that you do not ask them for plans. They do not submit plans for either capital improvements or maintenance upfront.

  Mr Stevenson: Thank you.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2002
Prepared 24 October 2002