Examination of Witnesses (Questions 180
WEDNESDAY 21 NOVEMBER 2001
180. Has the same performance calculation been
done with some private sector companies I could point out to you,
or has it been just London Underground?
(Mr Poulter) I think that the point for this comparison
is that the private sector's bids are based on them taking the
risk of performance.
181. I am coming to risk in a minute. I do not
think I can press that point any further. I am not quite sure
that we are there. One more question about the seven and a half
year review, if I might. Is it correct that, the arbiter which
has been referred to, their responsibility is confined to price-setting
and has no consumer protection role?
(Mr Callaghan) Yes, I will happily answer that. The
answer is that the consumer protection role that is often taken
by regulators in privatised utilities does not have a function
here, because the consumer is represented by London Underground,
accountable through TfL and the GLA.
182. But the arbiter, who, presumably, would
be crucial in any disputes on the seven and a half year review,
has got no consumer protection role, it is simply a matter of
(Mr Callaghan) London Underground does the consumer
protection role, and the arbiter does not.
183. I checked that, but the arbiter does not,
that is the answer to the question, yes. My last question is about
risk, because, according to the information we have got, there
is a £30 million cap on budget overruns for the Infracos;
is that correct? The Infracos need a £30 million cap on budget
overruns, in addition to all the other elements of risk which
the public sector will continue; is that correct?
(Mr Callaghan) It is not correct, no.
184. Is there a figure; is there a cap, and,
if so, what
(Mr Callaghan) Is there a cap on the extent to which
the Infracos are protected from budget overruns; no, there is
185. There is not; so, it could be
(Mr Callaghan) Unlimited.
186. That is very helpful. Could I just ask
about the risks; is it the case thatwell, the National
Audit Office identified a number of areas of risk which, according
to them, remain unquantified and difficult to quantify, the risk
of legal disputes, division of responsibility of the tube network,
the risks of loss of flexibility, and, in particular, what caught
my eye, risks associated with revenues, safety, legislative and
environmental change will not be transferred to the private sector.
Could you confirm that; is that correct?
(Mr Callaghan) The answer is, if I remember those
four things correctly, it is true that the risks of those
187. Shall I repeat them?
(Mr Callaghan) Please, do.
188. The latter ones are risks associated with
revenues, safety, legislative and environmental changes will not
be transferred to the private sector?
(Mr Callaghan) May I deal with those one by one. On
the question of revenues, it is fairly common, in deals like this,
for the private sector to be paid partly on the basis of what
the public sector client organisation takes in, in revenues, in
our case, it would be revenues from passengers; in this case,
we are not asking the Infracos to take risk, we are taking that
risk. So, in terms of our customer revenue, they are not taking
the risk; clearly, they are taking risk on revenue caused by shortfalls
in their own performance. In terms of safety, the Infracos have
to comply with ordinary safety legislation, just like any other
business does, and they have to accommodate the cost of that within
their own figures. If there are specific things that need to be
done for railway safety purposes, which are in addition to that
which we already do, then it is correct that those new measures
are paid for by the public sector.
189. That is helpful, and I wonder whether,
through you, Mrs Dunwoody, we could have a more detailed paper
on this, because on the basis of the headings, and I recognise
they are headings, and the responses we have had, which, in the
time available, I recognise is likely to be curtailed, through
no fault of yours, but I certainly would like to have these issues
fleshed out a bit? The issue of revenues and fares that you referred
to, would the fact that, over the last two years, the fare box
revenue has fallen away to £73 million be something that
the public sector would carry, under this arrangement?
(Mr Callaghan) The £73 million is the difference
between the revenues that London Underground gets through fares
and its costs; so that derives directly from what goes through
London Underground's business. So the figure you quote is not,
strictly speaking, a revenue number, the revenue number is the
number of passengers and the
190. But it is the number that will be used
for the calculation of the 30 per cent that you have to talk about?
(Mr Callaghan) The number that is left over is what
the London Underground contributes from its operations to funding
191. So, therefore, it is an important number?
(Mr Callaghan) I agree, it is an important number,
but, in terms of the question of the risk that the private sector
are taking, that is not part of their risk calculation.
Chairman: No, I think that is what we realised.
192. And, very finally, those headings, and
if it is not possible to do it today, perhaps if we can have some
more detailed information, has there been any value assessment
put on these risks that are not going to be transferred to the
private sector, both perhaps annually, seven and a half years
and over the 30-year period?
(Mr Poulter) Some such risks have been quantified.
I think most of the ones that you are talking about there have
been assessed qualitatively, not financially.
193. Not financially; so, as things stand, subject
to the additional information we get, all these risks that will
remain in the private sector have not been quantified financially?
(Mr Poulter) Where possible, they have been, but,
as the National Audit Office commented, some of the risks are
not capable of quantification.
194. I am sorry, but I did make the distinction
between what the National Audit Office said and others. So it
is the second lot, and, to repeat, revenues, safety, legislative
and environmental change will not be transferred to the private
sector, you have not disputed that statement; what I want to know
is, have those risks that will remain in the public sector been
(Mr Callaghan) Let me deal with two examples. Revenues,
yes, it is part of our normal practice to estimate what the range
of revenues could be. In terms of legislative risk, that is one,
as Tony said, that cannot be quantified because it is impossible
to foresee what legislative changes might happen, so this is one
you can only deal with when
195. Can I pursue you then on the safety one,
and the engineering standards, they are not adequate at the moment,
(Mr Callaghan) They are adequate at the moment, yes.
196. I thought they had to be actually overhauled
in order to make the Public Private Partnership work?
(Mr Callaghan) That is a point of view which has been
expressed, but which is certainly not our judgement.
(Mr Smith) Chairman, I wonder if we might clarify
the position on our engineering and safety standards, for the
Committee. Mr Strzelecki probably is best able to do that.
(Mr Strzelecki) Yes, Mr Bennett. We have a framework
of standards which has been developed in the company over the
last decade, and we also, where appropriate, comply with national
standards. In the framework of the PPP contracts, there are other
things that also help to manage safety, like the powers of intervention
London Underground have, like our health and safety management
system, which is mandated on the infrastructure companies and
is part of the safety cases which they are required to have to
operate. And the standards are a continually developing set of
documents, for a railway which is disparate and old, and we are
continually improving them and making them more applicable to
the changing railway. So that continues under the PPP.
197. And have you done all the work that is
necessary for that, or is it behind schedule?
(Mr Strzelecki) No, it is not behind schedule, it
is on programme, and, just to emphasise it, it is a continuing
process. If I go back just over ten years, the underground did
not have standards in the form it now has, this is something that
we have developed over the last decade, or so, as part of our
safety management arrangements, which are extensive and rigorous,
and we will go on continuing to develop that, and it is mandated
in the PPP contracts that improvement must continue.
198. Who pays for it?
(Mr Strzelecki) It depends. Basically, if London Underground
decides, and it has the power to decide, that it needs to introduce
a new standard for safety reasons, or any other reason, then the
underground pays, because, obviously, it would not be proper to
expect the Infraco to have priced for something it did not know
about in advance. And if it is a legislative change, because Parliament
decides that new regulations are required, new laws are required,
then also the underground pays, the public sector pays.
199. Right. Now all of this needs a fair number
of skilled people to do it, does it not?
(Mr Strzelecki) It does.