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


Examination of Witnesses (Questions 222 - 239)

WEDNESDAY 6 MARCH 2002

RT HON STEPHEN BYERS, MP

Chairman

  222. Secretary of State, I want to come on to the PPP for London Underground. London Transport told us that it started the Public-Private Partnership "in order to get the funds to fix the tube". Does that mean that this is a failure on the part of the Treasury?

  (Mr Byers) A failure on the part of the Treasury?

  223. Yes. Do the Treasury not understand the interests of public transport, or do they just think this is a business rationale for adopting the PPP?
  (Mr Byers) No, I think the PPP—this is the important thing for me as Transport Secretary—will secure the investment in the London Underground that has been denied for generations.

  224. So it was not just decided that it was a good way of ensuring no public money went into it?
  (Mr Byers) I think the figures will show that there is a significant amount of public money that will be going into London Underground, both in terms of the modernisation of London Underground as part of the Public-Private Partnership, but also in terms of the grant that we make available for other operating costs.

  225. But of course it will not be recorded in quite the same way in the Government's balance sheets, will it?
  (Mr Byers) That is true, because it is a public-private partnership and it will be so operated.

  226. So it is quite a good wheeze in one way, is it not?
  (Mr Byers) Some may say it is a good wheeze. I think the important thing is whether or not the travelling public in London will see improvements to the London Underground. I really do believe that as a result of the effectively £1 billion a year investment that will be going in, then we will begin to see improvements as far as the Underground is concerned.

  227. I think my colleagues might want to take up various aspects of that. Is there any reason why a properly funded public alternative could not provide all the benefits that are suggested by the Public-Private Partnership?
  (Mr Byers) I think one of the reasons why we wanted to be clear that value for money would be achieved was to look at those alternatives, and I believe that that has been done. As the National Audit Office said, the problem with a value for money test is, it is not a pass/fail, there is always going to be a sort of subjective element, and a Secretary of State or London Transport will be judged on the decisions that they take. What is very clear to me is that this is a scheme that will secure lasting benefits as far as the Underground is concerned.

  Chairman: Perhaps we can discuss that with you. Mr Stevenson.

Mr Stevenson

  228. Risk transfer, Secretary of State. When you gave evidence to us in December, we understood that the risk transfer for cost overruns was £200 million per contract period. We now understand that this is £200 million per contract over 30 years of the contract. Is that the case?
  (Mr Byers) No, the infrastructure companies will bear the full risk of any cost overruns that result from their own inefficient or uneconomic behaviour; they will bear the full costs.

  229. The original tender documents stated that any cost overruns for the life of the programme (30 years) and all that exposure beyond will be on the backs of the infrastructure companies or the private contractors. We understand the current situation to be—that is, the current situation, the most recent round of the documents—that the £200 million figure that I quoted previously has been reduced to £50 million, something like £7 million per year of the contract, in expenditure of £1 billion a year. Can you confirm that, or is that not the case?
  (Mr Byers) No. The situation is that all of the equity put in by shareholders will remain at risk if the companies fail to perform, and I think the shareholders' equity is something like £500 million which is being put in. That is going to be at risk for cost overruns that result from inefficient or uneconomic behaviour, and that is a significant amount. So I saw the figure as well being quoted, and the figure does not accurately reflect the true situation which is revealed in the contracts.

  230. Is there not a cap, Secretary of State, on the amount of money that may be called in from the Infracos if they are deemed to be inefficient?
  (Mr Byers) There is no cap.

  231. There is no cap?
  (Mr Byers) No. All of the finance provided by the shareholders will be at risk if they fail to perform, which will provide strong incentives for good performance. There is no limit on the size of penalties for poor performance. If I can give an example of that, for example, under the contracts, a signal problem which delays services on the Jubilee Line for a day could be a penalty of over £300,000 being imposed on the infrastructure company, with no cap.

  232. Secretary of State, this, as you well know, is somewhat contrary to the information that we have, so can we be very clear on this, because I do not want to misunderstand, as I am sure you do not. Are you advising the Committee, on the record, that there is no cap on the amount of resource that could be called in from the Infracos if they are deemed to be inefficient and not carrying out their contract obligations?
  (Mr Byers) The cap is the limit of the finance being provided by the shareholders. That is, I believe, about £500 million. That is all at risk if they fail to perform, and the sort of penalties that can be imposed are like the one I just referred to in relation to the Jubilee Line where potentially there could be a penalty of £300,000 a day for a signalling failure there which delays services.

  233. So there is a cap?
  (Mr Byers) There is a cap based on the equity being put in by the shareholders, but that is £500 million.

  234. Yes. I am a lay person here, so I am looking to you to help. Irrespective of where it comes from—shareholders, Infracos, whatever—the Infracos have got a cap on the amount of resource that can be called in, from whatever quarter, within their companies?
  (Mr Byers) The cap is based on shareholder finance which totals around £500 million in the first 7½ years.

  235. It is £500 million in the first 7½ years, it is not £50 million?
  (Mr Byers) No, it is £500 million.

  236. So it is £500 million in the first 7½ years. What is it over 30 years, Secretary of State?
  (Mr Byers) I do not have that information in front of me, but I can certainly let the Committee know.

  237. Would you do that, please?
  (Mr Byers) Yes, of course.

  238. The information we have is that over 30 years it is something like £300 million out of a total anticipated investment of £15 billion. Are you not arguing about the inefficient and inefficiency in terms of performance of the Infracos, and are you not saying that they can only lose on that inefficient behaviour?
  (Mr Byers) Yes. I am talking specifically about their own inefficient or uneconomic behaviour. That is when this £500 million over 7½ years would be at risk.

  239. I think we are going to have to return to that. Can I turn to one other question, and that is that evidence that we took, I think, last week, which I thought was quite disturbing or potentially disturbing, which relates to possible conflict of interests. Would you confirm, do you know, Secretary of State, that PricewaterhouseCoopers are auditors to Bechtel (Tube Lines), the same company are auditors to Halcrow (Tube Lines), the same company are auditors to W S Atkins (Metronet), the same company are auditors to RWE, the parent of Thames Water (which is Metronet); Ernst & Young, whom of course you quoted widely from in your statement of last week about the benefits of the PPP, are auditors to Jarvis plc (Tube Lines), the same company are auditors to Bombardier, Canada (Metronet); Cap Gemini Ernst & Young have a £25 million joint venture with W S Atkins for IT development, and Ernst & Young were appointed by your Department as administrators for Railtrack? I do not want to mention Enron, but is there just a touch of potential conflict of interest in that situation, at the very least?
  (Mr Byers) I think the problem we have is that there are only five major accountancy firms in the UK that do this sort of business. You will also find, I think, that at least one of the firms that has been involved in advising those involved in the PPP have also had contracts from Transport for London, from the Mayor and from Bob Kiley, so it is a question of looking at the work which is carried out by those organisations. As to the Ernst & Young work certainly that they have done for me, I have been very open, there has been a full disclosure of all the information that they have provided to me, and people will make their own judgement, but I am afraid it is just the nature of having only a handful of major accountancy firms that do this work.


 
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