Q371 Chairman: Thank you very much for that declaration. Perhaps I could ask the first question and get us started. What do you see as the appropriate role of the private sector in transport infrastructure provision? Where does the private sector come in on this in terms of procurement? That is an overview question, if you like, to get us started. Professor Glaister: At the moment almost all transport services are provided by the private sector in this country. In the balance of history they have always been provided by the private sector with some periods when, of course, they were nationalised. The technical answer to your question I guess is that it depends what you want to achieve, but I see no difficulty in principle in using the private sector to deliver services. The issue, which I guess is your interest, is how the procuring authority-the public authority, whether it is central government or local or whatever-imposes its wishes in the public interest on the activities of the private sector and that is a particularly interesting question when, as is often the case, there are subsidies involved and the tax payer is putting in a contribution. The issue for me is not whether it is appropriate use of private sector-it plainly can be highly appropriate use of private sector-but the form of contract or licensing arrangements between the public sector and the private provider. Plainly you can, as a matter of choice, use the public sector to do all of the provision but that is quite rare these days.
Mr Allen: Speaking from the point of view of an operator of transport services, I agree with everything that Stephen has just said. It seems to me the key thing, as a public authority, is to be clear about what are the things you need to manage yourself and you need to own effectively that knowledge in-house and what are the things that can be put out to the private sector or not as a matter of choice. That then becomes a judgment about what is the most effective and efficient way of operating those things. As the operator of the services I think you need to be able to keep, for example, a knowledge of your own asset base in-house; I think that is something you cannot outsource. I would say as a matter of public policy generally the public authority wants to specify certain things about the level of services that are provided, but how those are provided are often things that can be a matter of choice as to whether or not you contract them out or manage them directly yourself. Often it is an accident of history more or less as to whether things are publicly provided or privately provided.
Mr Bolt: To echo that, clearly there are debates in some of the transport sectors, the status of Network Rail is an obvious example where it is clearly classified to the private sector but a 100% of its debt is guaranteed by government and is operating within a funding framework set by government. I think the issue-which we will probably come onto in more detail-is not so much what can the private sector do (because it can do, as Stephen says, virtually anything in the transport arena you want to), it is how is that best structured to deliver value for money and deliver the strategic objectives which, to use the old-fashioned phrase, government is looking for from what is essentially a public service.
Q372 Lord Moonie: We have heard of the difficulties of the London Transport public/private partnerships; what is your view of the general performance of transport public/private partnerships both in the UK and elsewhere?
Professor Glaister: May I just clarify, when you talk about PPPs are we to include in that PFIs? There is technically a small difference.
Q373 Lord Moonie: Yes, I am using it as an umbrella term.
Professor Glaister: In that case I would say it has been an extremely mixed experience in the transport field and I think you would get that impression from reading the various reports from the National Audit Office on the subject. I think it has worked well and I would expect it to have worked well when the situation is relatively simple. I am sure we will keep coming back to this point, but I think that if you are going to have a contract between the private sector and a public authority it must be one which can be enforced and managed and one where the private sector has been able to set down on paper what it wants for the period of the contract and that, for a PFI, is typically as long as 30 years. You would expect it to work well where the situation is very simple, perhaps if it is just a piece of highway that the authority wants; it is relatively easy to say what you want from a highway for the next 30 years, although there are complications there. The record shows that they have been, with mixed results, generally speaking successful. Where the situation is very complicated and subject to very rapid policy change and rapid economic change, I would expect it to be less successful because the length of the contract becomes much more of a problem and it becomes much harder for the public authority to write down in a contract which is enforceable and manageable what it wants.
Mr Bolt: Just to add a little bit to that, you refer to the problems with the Underground PPP. I think against a background of what Stephen has said, one of the challenges there was to develop a framework which could take an existing operation-an existing set of assets-and apply some of the principles of PPP and PFI. Given the uncertain state of the assets and the pace with which transport demand over a whole network like the underground changes, that led to a need for periodic review provisions and extraordinary review provisions and some of that introduces complication which has proved problematic with the PPP. Some of the contractual complexities followed, I think, from the nature of the assets which were being put into the PPP structure.
Professor Glaister: There was the further complication in the case of the London arrangements in that there were I think four or five pre-existing PFI contracts and the PPP
was overlayed on that. The interactions between those five or six agreements created all sorts of special difficulties. Mr Allen: Again I agree with everything Stephen and Chris have said. One of the issues with the London Underground PPPs is that the role of on-going maintenance on an operating railway is necessarily quite intertwined with the operations, so it is very difficult to write a specification that you are not going to change for 30 years when you are having to make day to day changes in operational matters. I think one of the key tests of whether PFIs or PPPs are successful is that you can write an output specification that you effectively do not need to change more or less for the period of that contract, for the 30 years. It is relatively easy to contemplate that for a road or for bridge constructions-once you have described what it is you want built you are not really going to change it-and those have tended to be the more successful PFI projects in the transport arena.
Professor Glaister: It is not just the possibility that because of changes of political authority-what the authority wants out of a thing may change-it is also the change in the economic environment and London is a place where the economic environment has changed fantastically quickly and changes in the level of demand, for instance, the location where people work and live, the coming of the Olympics, the wish to build Crossrail, all sorts of things that have come along since the signing of that contract which create considerable difficulties with something that you write down in 2003 and expect to last for 30 years.
Q374 Baroness Hamwee: That was actually what I was going to ask about, the fare box being so vulnerable to economic changes really quite rapidly as I understand it. We have heard from other witnesses that one of the benefits of PFI is the bundling up of the creation of the asset and running it, but it rather sounds from what you are saying-I should not be putting words in your mouth-that transport is rather distinct from this, from perhaps a hospital or school and so on. I just want to pursue that a bit because it has come up from many of our witnesses that the services are as important as the building of the assets.
Professor Glaister: As you say, it is bundling the operation and provision but also the raising of the capital, the borrowing. There are three things tied together. I think the same principles do apply in other areas. I am not at all expert, of course, in hospitals but there is the same problem that you have to be clear what it is you want over that period in terms of the physical infrastructure. As medical practice changes it may well be the case that the type of building you specify is not actually what you want because you may change the balance between in-hospital care and out of hospital care, the kind of operating facilities and so on. The test I would apply is: can you be confident that you write down what you want for whatever the period of the contract is or can you draft in change provisions which is of course a way of dealing with these things? However, I think throughout the whole of procurement it is rare to find 30 year contracts which have not been regretted, apart from property leases which are different. Throughout the piece I think 30 years is a very long time.
Q375 Baroness Hamwee: I was wondering whether transport was distinct in that regard as well, in the length of time, to put it in lay terms, you would expect a road or a railway and the operation of it to last. Mr Bolt: It is probably not so much the particular type of asset as whether the nature of the demand for it is going to change over that period. I think there will be emerging problems on some of the other PFI projects where changes in those requirements mean that the lack of flexibility within a project financed contractual framework is a problem. The attempt in the London Underground PPP
is to get round that with the periodic review provisions, but I think the real question is whether that is putting together two mutually inconsistent models or whether it is actually getting the best of both models. Mr Allen: There is a further point that we should perhaps bring out. Projects that are about building a new asset and then maintaining that asset over a period are inherently easier to structure than projects that are upgrading or renewing an old asset and then maintaining it whilst you upgrade it and renew it and whilst you continue to operate it. Road projects that are greenfield road projects and maintaining a section of road over time are going to be much easier than trying to upgrade and maintain a bit of operating railway, doing it at night whilst you are continuing to operate it during the day.
Q376 Lord Griffiths of Fforestfach: If you accept the case you make which I think is very well made namely that you cannot forecast demand over 20 years- things are going to be changing and for the rail system it does have considerable implications- would you then advocate that state provision was superior to private provision?
Professor Glaister: I do not think that follows. It is to do with the nature of the contract. The problem with PFI contracts is that, because the authority wants to get the benefit of whole life costing over a long period of time and because the authority wants to reduce the annual payments, they tend to be very long contracts. Those are both advantages in a sense but they have the disadvantage you describe. It does not mean that you cannot use a procurement contract of a different kind which is perhaps much shorter with provision for re-letting the contract and at that point changing your requirements. The train operating company franchises are typically seven years-there is a lot of debate about whether it should be seven or 15 or three but they are much shorter than 30-and you have the opportunity at the point of re-tendering to change what you want. You are not tied into such a long commitment. It is not that the difficulty you described necessarily drives you towards public ownership; it is the full contract that matters.
Q377 Lord Tugendhat: I have declared my interests in the past but in view of Professor Glaister's appearance before us I think I should repeat that I am a member of the Council at Imperial College and I welcome him to the Committee in that spirit. We have heard from several witnesses that the introduction of PFI led to more rigorous risk assessment and better due diligence and altogether a more professional approach to traditional procurement. While quite a lot of people have said that, some people have said that it did so per se, as it were, and others that as practice developed so the due diligence became better and the risk assessment became better, that it was a learning process/ Either way I wonder what our witnesses think about that.
Mr Allen: I would agree with that as a general statement. I do think the involvement of private finance requires more rigour around the costing up front and more rigour around whole life costing of assets. All too often in a wholly public procurement you start off with an underestimated cost and the authority tends not to budget properly for maintenance of the asset over its life. So if you look back over the history of London Underground there has been a consistent history of failing to maintain the assets it has inherited. The problem comes back to something Stephen said earlier. When the contracts and the services that are being provided by the private sector are so complex I think some of those incentives around the rigorous assessment become quite blunted because the providers of the finance cannot actually understand very clearly the technicalities of what has been provided and then become very reliant on what the companies providing services tell them and it all becomes rather incestuous. It works very well when you have contracted for something relatively simple and it can be transparently costed and assessed; it works increasingly less well the more complex the bundling of the services that you are trying to contract for.
Professor Glaister: I would agree with the proposition that history shows that there has been more sophistication in those matters but I do not ascribe it to the PFI as such. You could have secured those skills within the public sector if you wanted to, it is just that we are not very good at doing that and I guess in other parts of the world they have been much better in risk assessing entirely public owned projects. In any case, you would expect those advantages to apply to other kinds of procurement from the private sector; it is not to do with PFI as such, it is to do with competence in for profit companies providing services. The debate at the time of the London Underground PPP was about whether you went with that suggestion or whether, as an alternative, you raised the capital through bond issues and then separately had procurement contracts with the private sector of a length to be determined (which is a slightly separate debate). Had you done that I think you would have expected the same kind of due diligence and so on from the private sector because then they are making a commitment for a long period of time so in the interests of the bankers and the shareholders they need to do those things. So you do not have to have a PFI deal to get those benefits. Mr Bolt: One additional point on that that I find rather surprising. Within this structure the role of the technical adviser to the lenders is particularly important but one of the observations I had during the Metronet saga was that over a period there was perhaps capture of the technical adviser by the company. Would the rigour of the oversight by lenders be improved, for example, if there was rotation of technical advisers in the same way that you have rotation of auditors?
Mr Allen: I would certainly echo what Chris says on that. Having been one of Metronet's lenders in a previous job there was concern amongst the lender group that the technical adviser was not offering independent advice and was too close to Metronet the company and that was because of the complexity of the contract. Essentially there was so much that the technical adviser had to advise on that the only way they could do was by getting themselves deeply embedded with the companies actually providing the services at which point the independence of their role had been lost. I very much agree with what Chris says on that point.
Q378 Lord Tugendhat: My impression from one of our witnesses, Sir Peter Dixon of University College Hospital, was that one of the problems he had run into was that PFI made the projects rather more inflexible, that the design for the hospital was as it was and time has moved on and you do it differently now. It was harder to change as a result. I see you nodding in agreement.
Professor Glaister: Yes. I am sure you understand this better than I do, but fundamentally the procurer says what it wants as an output for 30 years and it leaves it to the provider to design and build and operate something to provide that service. Once it has been done they have invested the money, they have a right to a return on that money and as long as they offer the services they undertook to offer they have got you "banged to rights", as it were, you are going to have to pay. You could of course change it but it will cost you money to unscramble the contracts and repay the commitment.
Mr Allen: I would say, however, that there are some positive aspects to that. One of the principal causes of cost overruns on public procurements is the procuring authority changing its specification repeatedly, so the fact that within a PFI contract there are constraints on the public authority doing that, that has been one of the reasons why you have seen fewer cost overruns once the contracts have been let, which then comes back to what we were saying at the outset, provided you can specify that requirement up front and not have to change it then there is probably some advantage to that, but if you are necessarily going to have to change it then you are going to pay through contractual variations.
Q379 Baroness Hamwee: I think we have covered quite a lot of the ground on this question but not all of it. Are large transport projects too large to conduct as PFIs
or is there something else about them which makes them hard to control regardless of the procurement method? Perhaps the point we have not covered is whether it might be helpful to break them down into smaller projects, smaller component parts. Mr Allen: I think some are definitely too large so we made a positive decision not to structure Crossrail as a PPP contract. It is down to the size of the risks you would be asking a contractor or even a consortium of contractors to take on a £16 billion project. It is just betting everybody's balance sheet on the outcome of that one project. The market will just not take that risk and I think you would struggle to find sufficient equity in a consortium vehicle to back that kind of risk. There certainly are some and I think one of the lessons might be that the London Underground PPP contracts were too large to structure efficiently.
Professor Glaister: I would say it is not size as such; it is, as I said earlier, to do with complexity and the ability to manage. I can imagine you might have a very large and very simple situation which you might consider doing under PPP or PFI. However, there is a point which I guess Steve has just alluded to, if you are going to have a contract like this you have to manage it effectively; you really do have to put a lot of resources into getting the provider to perform and indeed doing your own thing on site. If you are in a situation where things are going badly you will often, as a procurer, like to be in a situation where you can threaten to use alternative suppliers as a way of discipline. The problem with the London Underground and some other big ones is that there just is not an alternative supplier around to step in. Indeed, Chris may or may not want to comment about Metronet but we were in that situation and effectively the only practical solution-although it was investigated as to what the alternatives were- was for the thing to fall back into public ownership because that was the only way of keeping the service going. There was no way of saying that there was a third provider who could step in and take it over.
Q380 Baroness Hamwee: There might have been a political component in that as well.
Professor Glaister: Indeed.
Mr Bolt: With a large project the risk tends to be large. If it was just large but building something you had built a number of before then that might not a problem but where it has the complexity of London Underground or building major new rail routes or things like that, the risks are very significant in relation to the likely balance sheet of any private sector provider.
Professor Glaister: An alternative that was suggested at the time of the negotiations for the PPP was not three very large contacts but a portfolio of much smaller contracts. You might, for instance, have let a 20 or 30 year contract for one set of escalators and another contract for a different set of escalators; one set of trains and another set of trains would be different contracts. That is what Bob Kiley set out as a PPC, I think he called it. It was not that you could not use the private sector under contract, but they had been broken up into smaller more manageable segments and perhaps under shorter periods of time as well.