Examination of Witnesses (Questions 260
WEDNESDAY 6 MARCH 2002
260. No, I am delighted you have done! Are those
based on pre or post-tax?
(Mr Byers) I think I said it is the post-tax figure.
261. Earlier this afternoon you said to us that
value for money was not a simple pass/fail test. You did not say
that when you gave evidence to us on 5 December when you said
that a decision would be made on the basis of value for money,
and in answer to questions you confirmed that it would be your
decision and not under pressure from the Treasury. How do you
equate those different statements?
(Mr Byers) I do not think there is any conflict between
the two. I think it shows that it was not an easy decision to
take. The phrase "pass/fail" I think comes from the
National Audit Office report into how we should judge the Public-Private
Partnership for London Underground. That is why it would have
been easier to make a decision if it clearly was a pass or a fail.
In the end, it is a subjective judgement, which makes it that
much more difficult, because people will then question whether
you have made the right judgement. On balance, I thought that
value for money was achieved based on the advice of Ernst &
Young and the information of London Underground.
262. When we questioned Ernst & Young at
last week's meeting of this Committee, in answer to a question
on whether their report was about judging value for money for
the PPP, Mr Middleton, on behalf of Ernst & Young, answered
that their report could not in fact be used to judge value for
money for this scheme.
(Mr Byers) I am sorry, I missed that.
263. Ernst & Young told this Committee last
week that their report could not be used to judge whether the
PPP delivered value for money. What is your comment on that? That
is all on the record, and that was said to us last week.
(Mr Byers) I have not seen the evidence that was given
last week, but I think the report says that on the basis of the
information that they have and the assumptions that have been
made, they are looking in the round at the proposition, and bearing
in mind that it was a subjective judgement, then one could say
that value for money had been achieved. I think he is reflecting
the point that it is not a pass/fail, you cannot say one way or
the other, in the end it is a subjective judgement. I think the
terms of reference that the Chairman referred to make it clear
what we were asking Ernst & Young to do. It was not actually
to make a recommendation, it was to judge on whether or not London
Underground had gone through the appropriate procedures and had
the appropriate assumptions in the way in which they looked at
value for money.
264. What about the inclusion of the social
value of performance differences incorporated in the analysis?
That, in effect, made a difference of over £2 billion. Ernst
& Young told us that they were not aware of any previous PPP
or PFI project which made this sort of adjustment.
(Mr Byers) That is true, but I think we are looking
here at quite a different public-private partnership, in the sense
that it is a well established methodology for doing precisely
that which London Underground uses every day when appraising projects.
They do have a sort of social benefit adjustment which London
Underground have used now for a number of years. So it may be
unique as far as Ernst & Young were concerned, but it is something
that London Underground always do when they appraise projects,
because there is a real social benefit in having a London Underground
which is working properly, which does not have delays.
I think most people who use London Underground
will say, "Yes, there is a social benefit." There is
a cost if you are stuck in the Tube or if the Tube does not turn
up, so there is genuinely I think a social benefit which does
apply as far as London Underground is concerned.
265. What about the issue of fares and fare
increases? You have said there will be no above-inflation increases
in fares, does that mean that the Government will provide open-ended
funding for London Underground?
(Mr Byers) What we have said is that there is no basis
on the financial model we have for there to be a need to increase
fares above the rate of inflation, but when we transfer the London
Underground over to Transport for London and the Mayor
it will be their responsibility to decide what they want to do
as far as fares are concerned. In terms of the financial model,
we have not built in any increase for fares over and above the
rate of inflation.
266. Does that mean that you are intending to
hand over a problem to the Mayor?
(Mr Byers) No, I do not intend to hand over a problem
to the Mayor. I want to hand over a London Underground system
which has, firstly, secured a modernisation programme which will
bring in £16 billion over 15 years and, in addition to that,
have a sum of money guaranteed from the Treasury for operating
costs which will be a generous settlement. If I can achieve both
of those by the time I hand over to the Mayor, I think that will
be treating it fairly and also doing right by the travelling public
267. What financial commitments have been made
to London Underground?
(Mr Byers) We obviously have the situation where the
Public-Private Partnership will secure the additional £16
billion over 15 years, but we also I think need to enter into
a long-term funding agreement to support modernisation of the
Underground. What we are prepared to do is to make the biggest
ever Government commitment to the Tube, an average of £1
billion a year in grant each year for the core network. This compares
to around £320 million a year over the last decade on a comparable
basis and, even including the Jubilee Line Extension, the average
grant over the last ten years has only been around £720 million
a year. That will be a contribution we will make. It will allow
significant improvements to services and will support the additional
programme of modernisation through the Public-Private Partnership.
If I can quickly go through the figures we intend to give by way
of grant, showing it is not just a one-off or over one or two
2002-03 there will be £930 million; in
2003-04, £960 million; 2004-05, £970 million; but to
secure the future we are going beyond the three year spending
programme and in 2005-06 there will be £1,025 million; 2006-07,
the same figure, £1,025 million; 2007-08, £1,050 million;
2008-09, £1,050 million; 2009-10, £1.1 billion.
268. Absolutely committed sums?
(Mr Byers) Those are committed sums which the Government
is now saying we will make available to the Mayor and Transport
for London, a long-term funding agreement to support the
modernisation of the Underground.
269. That is an absolute commitment?
(Mr Byers) That is a commitment this Government is
making. We will enter into that agreement with the Mayor and Transport
for London and we passed on the details of that on 26 February.
270. Was the Treasury's price for that agreement
your acceptance of PPP even if it could not be shown it was value
(Mr Byers) No, because it was a quite separate set
of discussions which I had with the Treasury about the level of
this support, quite separately from the Public-Private Partnership.
271. Has the independent review of value for
money by Ernst & Young been published?
(Mr Byers) It has, yes, and it is on our website.
272. Has the Treasury provided any guidance,
specific written guidance, relating to contracts at all, and how
have these costs been interpreted?
(Mr Byers) Of course, our whole approach to the Public-Private
Partnership is a Government approach, it is not just an approach
from my Department. In the end, the decisions are mine on behalf
of the Government, and of course one consults colleagues in the
Treasury. It is only right and proper we should do that.
273. Do the Treasury intend to up-date their
assessment of value for money to incorporate the methodology adopted
by London Underground? Have they commented on this?
(Mr Byers) The value for money test which we have
taken is one which we had to do at the time based on the information
that was provided and which London Underground had as part of
274. Does Ernst & Young consult with the
Treasury on the issue that you have commissioned them to look
(Mr Byers) Ernst & Young reported to myself as
Secretary of State and I am sure they will have consulted a range
of people before they made their report. I have to say offhand
I do not know specifically whether they had meetings or discussions
with people in the Treasury.
275. Were Ernst & Young commissioned to
obtain value for money for the Public-Private Partnership or were
they just commissioned to compare the programmes between the PPP
and London Underground?
(Mr Byers) They were commissioned to report to me
on the process and procedures that London Underground had adopted.
276. The process and procedures, not value for
(Mr Byers) The terms of reference, which we have provided
to the Committee, make it very clear the basis on which Ernst
& Young carried out their work.
277. So you were not surprised when they gave
you a report which had at least five different caveats and they
said at the end of it, "We think their arithmetic is robust"?
(Mr Byers) It was the sort of report one often gets
from people in these situations. They have been very cautious,
very careful, but in the end they were able to say that they felt
the appropriate procedures and assumptions had been put in place
by London Underground.
278. You said, "Look at the methodology,
look at the assessment for the value of risks, look at the consideration
of both financial and non-financial factors, the basis of preparation
for the public sector comparator and the overall robustness",
and they came back in effect and said, "Thank you very much,
Secretary of State, we cannot judge this, this, this and this
because it is subjective, but we can tell you they have done their
(Mr Byers) And they have made the point, which I think
I have made to the Committee this afternoon, that in the end it
is a subjective judgment, that is the nature of value for money.
I will go back to the point that the National Audit Office made
when they reported on the procedures around the PPP for London
Underground, where they said very clearly, "It is not going
to be a pass/fail, it is far more complicated than that."
279. My final question to the Secretary of State
follows on the point you made, Chairman, and that is the question
of the value for money exercise which has been published by Ernst
& Young. Is that to be up-graded or up-dated as the programme
(Mr Byers) The value for money exercise and the advice
I received was in the context of making a decision on whether
or not we should proceed with the Public-Private Partnership.
I have always been very clear since I came in as Secretary of
State that there were three things which had to be achieved before
I would be prepared to recommend proceeding with the Public-Private
Partnership. One, that there must be no privatisation. Two, that
safety must in no way be compromised. Three, the Public-Private
Partnership had to offer value for money. It was in that context
that the Ernst & Young Report was commissioned. It is on that
basis that I arrived at my decision in principle that value for
money was achieved. That having taken place, I am not sure there
is a need for an up-date or another report.