WEDNESDAY 6 MARCH 2002

__________

Members present:

Mrs Gwyneth Dunwoody, in the Chair
Andrew Bennett

Mr Brian Donohoe
Mrs Louise Ellman
Chris Grayling
Helen Jackson
Miss Anne McIntosh
Mr Bill O'Brien
Dr John Pugh
Mr George Stevenson

__________

RT HON STEPHEN BYERS, a Member of the House, Secretary of State for Transport, Local Government and the Regions, examined.

Chairman

  1. 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?
  2. (Mr Byers) A failure on the part of the Treasury?

  3. 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?
  4. (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.

  5. So it was not just decided that it was a good way of ensuring no public money went into it?
  6. (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.

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

  9. So it is quite a good wheeze in one way, is it not?
  10. (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.

  11. 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?
  12. (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

  13. 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?
  14. (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.

  15. 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?
  16. (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.

  17. 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?
  18. (Mr Byers) There is no cap.

  19. There is no cap?
  20. (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.

  21. 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?
  22. (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.

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

  25. 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?
  26. (Mr Byers) The cap is based on shareholder finance which totals around 500 million in the first 71/2 years.

  27. It is 500 million in the first 71/2 years, it is not 50 million?
  28. (Mr Byers) No, it is 500 million.

  29. So it is 500 million in the first 71/2 years. What is it over 30 years, Secretary of State?
  30. (Mr Byers) I do not have that information in front of me, but I can certainly let the Committee know.

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

  33. 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?
  34. (Mr Byers) Yes. I am talking specifically about their own inefficient or uneconomic behaviour. That is when this 500 million over 71/2 years would be at risk.

  35. 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 Price Waterhouse Coopers 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?
  36. (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.

  37. But given that situation what steps are you taking to try to minimise the conflict of interest, or potential conflict of interest?
  38. (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.

  39. So you do not share my concern?
  40. (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

  41. So you have not asked, for example, for a written undertaking from them that there will be no conflict of interest?
  42. (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.

  43. 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.
  44. (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

  45. 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?
  46. (Mr Byers) Yes, and Plan B was to hand the Tube over to the Mayor and Transport for London.

  47. 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?
  48. (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.

  49. 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?
  50. (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.

  51. 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.
  52. (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.

  53. 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.
  54. (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

  55. 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.
  56. (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.

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

  59. 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.
  60. (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.

  61. But Mr Kiley is not suggesting that bond financing is the alternative.
  62. (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.

  63. 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.
  64. (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

  65. 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?
  66. (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.

  67. 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?
  68. (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.

  69. 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?
  70. (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.

  71. But it is clear, you do agree, therefore, that you made that statement against the wishes of London Underground?
  72. (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.

  73. 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?
  74. (Mr Byers) I have responsibilities to this House.

  75. Then can I ask you, Secretary of State, what return on equity are the PPP companies going to be receiving?
  76. (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!

  77. No, I am delighted you have done! Are those based on pre or post-tax?
  78. (Mr Byers) I think I said it is the post-tax figure.

    Mrs Ellman

  79. 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?
  80. (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.

  81. 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.
  82. (Mr Byers) I am sorry, I missed that.

  83. 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.
  84. (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.

  85. 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.
  86. (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.

  87. 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?
  88. (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.

  89. Does that mean that you are intending to hand over a problem to the Mayor?
  90. (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.

  91. What financial commitments have been made to London Underground?
  92. (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

  93. Absolutely committed sums?
  94. (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

  95. That is an absolute commitment?
  96. (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.

  97. Was the Treasury's price for that agreement your acceptance of PPP even if it could not be shown it was value for money?
  98. (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

  99. Has the independent review of value for money by Ernst & Young been published?
  100. (Mr Byers) It has, yes, and it is on our website.

  101. Has the Treasury provided any guidance, specific written guidance, relating to contracts at all, and how have these costs been interpreted?
  102. (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.

  103. 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?
  104. (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.

  105. Does Ernst & Young consult with the Treasury on the issue that you have commissioned them to look into?
  106. (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.

  107. 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?
  108. (Mr Byers) They were commissioned to report to me on the process and procedures that London Underground had adopted.

    Chairman

  109. The process and procedures, not value for money?
  110. (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.

  111. 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"?
  112. (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.

  113. 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."
  114. (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

  115. 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?
  116. (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.

  117. What about the social costs involved? You lay out there the three principles involved but social costs, as you pointed out earlier, are a very important factor also. Are they built into the value for money exercise?
  118. (Mr Byers) That is part of the value for money exercise.

    Dr Pugh

  119. Can I press you on the subject of commitment to London Underground and Transport for London. Is this a commitment in any sense which could be reversed? If it was reversed or changed or modified, could it be the subject of legal action by Transport for London?
  120. (Mr Byers) I think we want to enter into an agreement which is as secure as possible. We always have a difficulty in terms of binding governments in the future.

  121. But if the Treasury changed its mind, the Mayor would have no redress?
  122. (Mr Byers) We want to have a situation where it is contractually watertight as far as both parties are concerned. What I also want to do as part of this funding arrangement is to secure real improvements in terms of London Underground and there will need to be targets which London Underground sign up to, which Transport for London sign up to, as a result of this funding arrangement.

  123. At last week's Select Committee several members had an interest in what kind of guarantee was being put to PPP lenders, and the answer came back that by and large there was not a guarantee, there was a comfort letter in prospect from the DTLR. Is it true that in the PPP service contract if there is no comfort letter arising, they have to get a comfort letter equivalent to a guarantee from a bank? If that is the case, does that not mean a comfort letter is effectively the economic equivalent of a guarantee?
  124. (Mr Byers) We get into the sort of legal niceties of that. A comfort letter would not be a guarantee; it would describe and clarify the role of the Secretary of State in relation to the Greater London Authority and Transport for London and the arrangements for paying grants to those bodies. The bidders and the backers have said they would welcome such clarification. We would want to be helpful, and we would then be prepared to issue such a comfort letter, should the decision be taken to go ahead with the modernisation proposals.

  125. But does the contract actually say that if there is no comfort letter than a bank letter of credit must be obtained?
  126. (Mr Byers) The important thing for me is whether or not I should issue a comfort letter clarifying my role, and that is what I would be prepared to do, subject to following the normal procedures.

  127. I have a second point which is basically relating to the contract. Schedule 1.9 of the contract addresses key risk transfer and pricing issues. That is quite fundamental to the whole deal. As I understand it, this as yet is not concluded or even finished or finalised?
  128. (Mr Byers) No. As I said to Mr Grayling, there are still issues which are still not resolved. If they lead to any material change - I said this very clearly, I think, in my statement to the House - in a change which adversely affects value for money, and the risk is clearly one of the key factors there, then we will not proceed with the modernisation proposals.

  129. I have a very quick question. 2 million savings you say are going to be made. Is that still your view - 2 million savings?
  130. (Mr Byers) That is based on the mid-point on the public sector comparator compared with what we expect to achieve through the PPP.

  131. Given that these are cash savings, not money in hand, what simple tests will be applied to ensure that these savings will be made?
  132. (Mr Byers) It will be a question of comparing what we do achieve with what we expect would have been achieved had we gone through the normal public sector route. That is the way it needs to be judged, because the 2 million savings are savings comparing the Public-Private Partnership with the mid-point of the public sector comparator.

    Chairman: In which we have already added in the social element which has not been in the other estimates.

    Andrew Bennett

  133. Neither Ernst & Young nor London Underground actually supported that 2 million figure, did they?
  134. (Mr Byers) London Underground did not address it. As I say, the way in which it has been derived, the way -----

  135. It is your hope, is that it, rather than that it is supported either by Ernst & Young or London Underground?
  136. (Mr Byers) It is based on the figures contained in the public sector comparator, the mid-point of the public sector comparator which London Underground had worked up, and the mid-point seemed to be a fair way, a reasonable way, of trying to judge the savings that would be achieved.

  137. If the Health and Safety Executive want to put a notice on requiring something to be done, or to stop something happening, on whom do they serve the notice - London Underground or these contractual companies?
  138. (Mr Byers) This is if the modernisation plans go ahead?

  139. Yes, it is.
  140. (Mr Byers) At the moment the Health and Safety Executive are looking at the safety case.

  141. I understand that, but who actually will own the various bits of the new operation if it were to go ahead?
  142. (Mr Byers) That is something which is part of the safety case. The important thing is, the infrastructure companies will be reporting to London Underground. London Underground will remain in control, but the safety case is still being considered by the Health and Safety Executive, and they will need to decide whether or not the safety case is one that they are prepared to sign up to or approve. If they do not do that, then once again we will not proceed with the PPP.

  143. So who takes the risk that the Health and Safety Executive will require something to be done? Is it the new contractors, or is that a risk that remains with London Underground?
  144. (Mr Byers) That depends on the safety case which is finally approved by the Health and Safety Executive.

    Chairman

  145. Secretary of State, I am going to let you go. I am going to ask you some more questions in writing, but I just want to say one thing to you. Are you prepared to let the House of Commons and the elected Members debate this on the floor of the House on a Substantive Motion, because many of the questions that you have answered today leave us with worries about the transfer of risk, the length of time, the health and safety, and frankly these are things which should be debated by elected Members. Will you give us that undertaking?
  146. (Mr Byers) Those are not issues for a Secretary of State, as you know, Chairman.

  147. Would your Department be prepared to ask the Leader of the House to find time on Substantive Motion to allow the elected Members to vote on this particular arrangement which, after all, is going to determine the future of transport in London for the next 100 years?
  148. (Mr Byers) As you know, Chairman, these are matters for the business managers, not for a Secretary of State. What I can say is that I am not prepared to see anything stand in the way of 16 billion of investment going into the London Underground. This has been discussed endlessly, and I think we now have to get on with seeing the money going in.

  149. So even though at the moment the contracts are not signed, it is not clear what risk has been shifted, it is certainly not clear from some of these other very basic bits of information exactly what it is that has been handed over to Transport for London, you would still not be prepared to allow us to have a debate on a Substantive Motion?
  150. (Mr Byers) It is not a question for me, Chairman, it is a question for the business managers, as you know.

  151. You have the right, Secretary of State, to ask. I am asking, is it your view that before the contracts are signed, or immediately upon the signing of the contracts, you would come back to this House?
  152. (Mr Byers) I will be judged by the House and will be held accountable by the House.

  153. Secretary of State, you have been patient, and doubtless we shall meet again. Thank you for your attendance.

(Mr Byers) Thank you very much, Chairman.