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


Examination of Witnesses (Questions 260 - 279)

WEDNESDAY 6 MARCH 2002

RT HON STEPHEN BYERS, MP

  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.

Mrs Ellman

  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 in London.

  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 years: in

  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.

Chairman

  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.

Mrs Ellman

  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 for money?
  (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.

Mr O'Brien

  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 their approach.

  274. Does Ernst & Young consult with the Treasury on the issue that you have commissioned them to look into?
  (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.

Chairman

  276. The process and procedures, not value for money?
  (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 sums correctly."
  (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."

Mr O'Brien

  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 unfolds?
  (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.


 
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