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


Examination of Witnesses (Questions 240 - 259)

WEDNESDAY 6 MARCH 2002

RT HON STEPHEN BYERS, MP

  240. But given that situation what steps are you taking to try to minimise the conflict of interest, or potential conflict of interest?
  (Mr Byers) The firms involved make it very clear the basis on which they are providing advice, and it is on the basis they are advising a Secretary of State in this particular case or a particular organisation. It will be a separate group of people within the organisation who will be providing that advice.

  241. So you do not share my concern?
  (Mr Byers) I think it is unfortunate there is such a small number, because there will be a public perception, whether it is true or not, that somehow information is going from one side to another within the organisation. As I say, when people look at those who are advising Transport for London and the Mayor they will see some of those people are also advising on the PPP, and I am afraid it is a fact that we only have a very small number of accountancy firms which do this sort of business.

Chairman

  242. So you have not asked, for example, for a written undertaking from them that there will be no conflict of interest?
  (Mr Byers) Certainly as far as Ernst & Young were concerned, the team who were doing the work, they were very clear there was not a conflict of interest.

  243. Forgive me, lots of us can be quite clear as to what we are doing but it is worrying, given you accept there is such a limited pool from which these people can be drawn, there is not a written undertaking that there will be no conflict of interest and no personnel will be employed on different schemes where there can be any conceivable overlap.
  (Mr Byers) I am sure it is part of the agreement which will be entered into when the contract is let, but let me double-check on that and let you know, Chairman.

  Chairman: That is very kind.

Mr Donohoe

  244. Secretary of State, we were very encouraged when you made the announcement to this Committee that you were going to re-examine the whole question of the way you were going to construct the plans for London Underground. I have to say I was rather disappointed by what you told Parliament, where you almost suggested there was no meaningful alternative to the PPP. I just wonder in those circumstances, did you ever have a Plan B?
  (Mr Byers) Yes, and Plan B was to hand the Tube over to the Mayor and Transport for London.

  245. How closely was that examined? It is almost unbelievable, sitting here listening to evidence which is almost the direct opposite of the evidence we read. It is almost as though you are playing a game of poker which is not going to end, because you never know what the result is going to be in terms of a real examination of the alternatives. Mr Kiley told this Committee last week that he had provisional backing from the banks for up to £3 billion in loans, does that not suggest he did have and does have a credible alternative?
  (Mr Byers) The Ernst & Young Report, because I asked them to do it, looked very carefully at the financing through an issue of bonds. I did that because, as I think I may have said to the Select Committee when I gave evidence before, I took the view that whilst clearly we would have the public sector comparator drawn up, if we were simply comparing PPP with that then most people would say, "Actually you are not comparing it with what the real alternative might have been", which is the model promoted by both the Mayor and the Commissioner, which is financing by way of a bond issue. So the Ernst & Young Report looks at a bond issue as well. It is true to say that in certain situations it is a very close call between the modernisation Public-Private Partnership and the value for money from a bond issue. So we did look very carefully at that. What I would say is that the £3 billion of funding that the Commissioner may have secured would not gain the sorts of improvements we are likely to see as a result of the £16 billion that we expect to be invested over 15 years.

  246. Given there were obvious constraints on those consultants who we had giving evidence, which very clearly suggested to me at any rate that the parameters in which they worked were so narrow they were not in a position to fairly judge the alternatives, if you look at it on the basis I did and on the basis of being politically sound, surely, given the resistance there is to the proposal of the Government, you should have erred on the side of Mr Kiley's submission rather than the alternative?
  (Mr Byers) I think it is important to be impartial and judge accordingly, which I would like to think is what I did when I had to consider whether or not value for money would be achieved by the Public-Private Partnership. That was the judgment I had to take. I took the view, taking into account all of the issues, that as things stood value for money would be achieved. It was not an easy decision; on some of the assumptions, some of the scenarios, it was a very close call. But I felt on balance value for money would be achieved.

  247. From what Mr Kiley said to us last week, to me at any rate, it looked as though he was going to be investing, he was going to have the whole stock revamped, renewed, within a very short period of time, and in actual fact the PPP is not going to deliver anything like that. That is what I worry about, the delivery of the service as far as the public is concerned. If he continues to make statements as he is, and it is against the background they are not being challenged by you, I am very clearly of the view we have the worst of the two options. Nothing which has been said is convincing me, and I would argue perhaps this Committee, that in actual fact we are getting value for money and we are going to deliver a reasonable Underground in London in the period that you suggest. There has been no argument to that effect that is overwhelming.
  (Mr Byers) I know the allegation or the assertion which has been made by both the Mayor and by Bob Kiley that under the PPP proposals there will be hardly any investment and no improvements before 2010. That is the period they have chosen, and I think that may have been the basis upon which comments have been made. I think it is worth stressing the point that in the period up to 2010 there will be £1 billion every year going in by way of investment. If I can just explain to the Committee what that will be spent on: around 40 per cent of that, so £400 million a year, will go on maintenance, and better maintenance means better reliability and less delays, and we have calculated that by 2010 the number of hours of delays to Tube passengers will be cut by a third, and that means passengers will save around half a million hours of delays each year, so that is a real improvement which will be made. If I can just say where the rest of the money will go: 60 per cent of it, £600 million, will be spent on major capital investments, and the sorts of improvements we will get from that—and I just give the example of the Jubilee Line because it is important to get this on the record—on the Jubilee Line all trains will be one carriage longer, which means 16 per cent more seats, there will be 12 extra trains and, together with the new signalling system which will be introduced, overall capacity on the Jubilee Line will be increased by 22 per cent by 2010. These are real improvements and real investment which will be going in between now and 2010.

  248. The problem for us all who use the Underground is that that has not been sold; you have not sold it. If there were to be tomorrow a referendum of the travelling public on the London Underground system, and you have put your point of view and Bob Kiley has put his point of view, Bob Kiley would win hands down.
  (Mr Byers) The problem I have is that I have to take a judgment and it would be wrong for me to—

  Mr Donohoe: Am I right—

Chairman

  249. I want to come back to something the Secretary of State has said. I have the terms of reference here of the Ernst & Young Inquiry. There is no reference in this at all, absolutely no mention anywhere, of the Transport for London scheme. You did not ask them to look at it. Indeed the evidence Mr Kiley gave did not refer to the bond scheme.
  (Mr Byers) I think you will find, Chairman, that the Report from Ernst & Young to myself did look at the relative costs of a bond financing arrangement.

  250. You did not ask them to do that, did you?
  (Mr Byers) But they did it.

  251. It is not at all in their terms of reference. Nor—and forgive me because you have quoted it as though you looked at what Mr Kiley was pointing out as an alternative—were they talking about a similar scheme at all.
  (Mr Byers) The bond financing arrangement was in the Ernst & Young Report to me because I specifically asked them to do it. That may have happened after the terms of reference were drawn up but it is within the Report. The Report is on the public record, if you look at the website you can look at it very quickly—an adviser is whispering madly there and he probably has a different point of view—and a bond financing arrangement was looked at.

  252. But Mr Kiley is not suggesting that bond financing is the alternative.
  (Mr Byers) The alternative that was mooted by the Mayor was the one that we looked at, because I thought that was the right one.

  253. He also said he could produce in a very much shorter time many more trains than 12, and he quoted his experience of having taken over New York Underground, with a very much worse system, in a very much more dilapidated state.
  (Mr Byers) On the comment about 12 trains, it is interesting that the period 2010 has been deliberately chosen, because if we go to 2011 we will suddenly find that we get a large number of new trains coming on, with 92 new trains on the Piccadilly Line, for example. The issue is this, Chairman, that if you look at the London Underground, what are the priorities? Is it putting new rolling stock on the Underground, or is it sorting out the track and signals? What we have on the London Underground in many parts is a Victorian system or an Edwardian system, and what it desperately needs is not new rolling stock; what it needs is new signals and new track to make a real difference, and that is what will come through the Public-Private Partnership. 60 per cent of it is capital investment, so £600 million a year going into things like track and signals.

Chris Grayling

  254. Secretary of State, you referred to the Jubilee Line extended trains and so forth. Can I refer you to page 24 of the document The Background Analysis to the 10 Year Plan, where you say, "An east-west rail link, such as CrossRail, will be the crucial element in providing crowding relief to east-west Underground lines (Central, Jubilee, District, Circle, Metropolitan). Our modelling suggests that, without it, most east-west lines on the Underground would be more crowded than today, despite other improvements." Do you still stand by that statement?
  (Mr Byers) I think that what has happened is that this is a good example of the 10 Year Plan not being in tablets of stone, which is the point I made at the beginning of my evidence, which is that during ten years things will change. When the 10 Year Plan was brought up, as the hon. Member will know, we did not know the contents of the Public-Private Partnership contracts, and what has happened is that priority is being given, in terms of improved capacity, to those lines which have those problems at the present time. That is what we are doing. So it is a ten-year plan, and when we report in July we will be able to reflect on the changes which have taken place since the Plan was first published, compared with the situation that we then have in the middle of 2002.

  255. Can I ask you, did Sir Malcolm Bates write to you on 6 February to warn you that key contract terms were not final, and that publication of the Ernst & Young report would damage the public sector's interest during the remainder of the consultation? Do you recall, you made your statement to the House of Commons on 7 February? Did he not write that letter to you?
  (Mr Byers) I was very clear, and I think I gave a commitment to this Committee, that I would publish the Ernst & Young report. I took the view that there was nothing in the Ernst & Young report which would compromise the negotiations that Sir Malcolm Bates was involved in. It is true to say that the contracts have not absolutely been finalised yet, because there is consultation going on, but I also said in my statement on 7 February that if there was any material change which meant that they became no longer value for money, then we would not proceed.

  256. But did Sir Malcolm advise you on 6 February, when you received that letter, which presumably was on 7 February, that key contract terms had not been finalised?
  (Mr Byers) We were always clear that the situation was that contracts had not been finalised, which is why I then said to the House that if there were any material changes, then we would have to review the situation. That has always been the case, because it would be wrong, bearing in mind that we were about to begin a period of consultation, if contracts had been finalised and had been signed up to, because that would make consultation a sham.

  257. But it is clear, you do agree, therefore, that you made that statement against the wishes of London Underground?
  (Mr Byers) I was very clear, and, as I said, I gave a commitment to this Committee, that we would be open about this process, and the consultation is only effective if people have all the material information available to them. That is what is happening. We have a situation where there is commercially confidential information which is provided in the bid room, to which Transport for London and their advisers have access. That is part of the consultation process. It is one of the reason why this House, when it came to the consultation, said the consultation should be with the Mayor and Transport for London, because the view was that they would respect commercial confidentiality, they could see the detail in the documents, which is what they are able to do, and they will be able to respond to the consultation process.

  258. Secretary of State, at a time when your leadership abilities are very much in question, given the chaos in your Department, how can it be right and proper for somebody in your position to overrule the express wishes of London Underground and publish a statement which they expressly said will be contrary to the public interest and will affect the negotiations they are having with the private sector companies involved? How can that be the right thing to do?
  (Mr Byers) I have responsibilities to this House.

  259. Then can I ask you, Secretary of State, what return on equity are the PPP companies going to be receiving?
  (Mr Byers) The return on equity will be nothing like the 35 per cent that the Mayor has repeatedly claimed. In fact the shareholders' rate of return is in the range of 15 to 20 per cent. This is the post-tax figure for the shareholders' return on equity and shareholder loans—in other words, how much money they actually get back for the money they put in—and this range is consistent with the expected rate of return to other major PFIs like road PFIs where the rate of return is around 15 per cent. So I have answered the question, which has slightly taken the wind out of your sails!


 
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