WEDNESDAY 6 MARCH 2002
Mrs Gwyneth Dunwoody, in the Chair
Mr Brian Donohoe
RT HON STEPHEN BYERS, a Member of the House, Secretary of State for Transport, Local Government and the Regions, examined.
(Mr Byers) A failure on the part of the Treasury?
(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.
(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.
(Mr Byers) That is true, because it is a public-private partnership and it will be so operated.
(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.
(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 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.
(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.
(Mr Byers) 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.
(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.
(Mr Byers) There is a cap based on the equity being put in by the shareholders, but that is £500 million.
(Mr Byers) The cap is based on shareholder finance which totals around £500 million in the first 71/2 years.
(Mr Byers) No, it is £500 million.
(Mr Byers) I do not have that information in front of me, but I can certainly let the Committee know.
(Mr Byers) Yes, of course.
(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.
(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.
(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.
(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.
(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.
(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 Byers) Yes, and Plan B was to hand the Tube over to the Mayor and Transport for London.
(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.
(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.
(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.
(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 ----
(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.
(Mr Byers) But they did it.
(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.
(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.
(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.
(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.
(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.
(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.
(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.
(Mr Byers) I have responsibilities to this House.
(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!
(Mr Byers) I think I said it is the post-tax figure.
(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.
(Mr Byers) I am sorry, I missed that.
(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.
(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.
(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.
(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.
(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.
(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.
(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.
(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 Byers) It has, yes, and it is on our website.
(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.
(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.
(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.
(Mr Byers) They were commissioned to report to me on the process and procedures that London Underground had adopted.
(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.
(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.
(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 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.
(Mr Byers) That is part of the value for money exercise.
(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.
(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.
(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.
(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.
(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.
(Mr Byers) That is based on the mid-point on the public sector comparator compared with what we expect to achieve through the PPP.
(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.
(Mr Byers) London Underground did not address it. As I say, the way in which it has been derived, the way -----
(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.
(Mr Byers) This is if the modernisation plans go ahead?
(Mr Byers) At the moment the Health and Safety Executive are looking at the safety case.
(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.
(Mr Byers) That depends on the safety case which is finally approved by the Health and Safety Executive.
(Mr Byers) Those are not issues for a Secretary of State, as you know, Chairman.
(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.
(Mr Byers) It is not a question for me, Chairman, it is a question for the business managers, as you know.
(Mr Byers) I will be judged by the House and will be held accountable by the House.
(Mr Byers) Thank you very much, Chairman.