Q91 Jon Cruddas: You would not accept the charge, which is a charge that is quite commonly put, that the refusal to consider alternative direct Government borrowing not only resulted in a waste of public funds but prevailed in powerful and unnecessary bargaining with leverage to the private sector risk benefit?
Mr Rowlands: No, as a matter of policy the Government decided that it wished the underground to be refurbished by means of the Public Private Partnership. It was prepared as a matter of policy to accept the inherently higher financing costs in the public sector.
Q92 Jon Cruddas: Because of the political imperatives, if you like, and the debates that occurred at that time you do not see that tilted the negotiating framework in favour of the prospective bidders?
Mr Rowlands: No. I think it made it more difficult for London Transport and London Underground to negotiate with the prospective bidders because there was a degree of political uncertainty. Certainly it reflected itself in a more prolonged process than anybody would have wished and arguably it impacted on some of the cost of it.
Q93 Jon Cruddas: Mr O'Toole, if I can come back to you, have you seen, I assume you have, the note from Bob Kiley which was sent to this Committee?
Mr O'Toole: On the first Report?
Q94 Jon Cruddas: Yes.
Mr O'Toole: I have seen it but the first Report is not anything that, I have to tell you, I can comment very usefully on since I came to this story after this battle was fought. I have focused pretty much on the matters that are contained in the second Report.
Q95 Jon Cruddas: I think you have probably just anticipated the question I am going to ask. I will still try anyway. It says in point two that: "The Underground understood that it faced a Hobson's choice: the PPP according to the terms demanded by the private sector or no new investment programme. Had a bond option been taken seriously, the final terms of the PPP would likely have been far more favourable to the public sector-as the bond option would have provided another 'and quite viable' form of competition to the private sector." Given your earlier comments, do you feel you cannot comment on that?
Mr O'Toole: I do not think I can comment usefully on that, no.
Q96 Jon Cruddas: Mr Kiley has commented quite effectively in terms of his views.
Mr O'Toole: Yes.
Q97 Mr Williams: Before we leave that-if you are leaving that-in paragraph 2.27 it says: "In modelling this risk there was, over the bidding period, a noticeable convergence between the public sector comparator (although this was kept confidential) and the bids". Why was it kept confidential?
Mr Rowlands: Paragraph 2.27 in the Report?
Q98 Mr Williams: Yes, 2.27.
Mr Rowlands: I have not seen Mr Kiley's letter.
Q99 Mr Williams: This is in the report which you signed up to. Paragraph 2.27 of the first Report on page 22.
Mr Rowlands: As a matter of, I suppose, in the end negotiating strategy, and perhaps policy, we did not make public what the public sector comparator was saying nor did we make available in any guise whatsoever any notion of what we might be prepared to pay because otherwise you were setting a target for the bidders to bid against.
Q100 Mr Williams: If they were converging, what was the problem?
Mr Rowlands: There was not a problem. They were converging because as people, I think, worked their way through the reality of what they were bidding against, there was a tendency for the bidders and for the PSC to begin to move into similar territory. Mr Callaghan may be able to help rather more than me on this, I do not know.9
Mr Callaghan: I will help if I can. As Mr Rowlands has said, and clearly there has been debate about this, one of the key issues in any transaction-this one because of its scale more than most-is whether or not this was the right thing to do given the alternatives that might have existed. The alternative we tested it against was a purely publicly funded alternative and a bond fund alternative. The analysis that we did suggested that this was better than either. You have to have a benchmark against which to test the prices which come back from the market. That benchmark at the time that we did this-and the guidance has moved on a bit-was the figure given by the financial calculation in the public sector comparator. If you know that is the thing that you are trying to get below and you make it public, all you do is invite the private sector to bid just to beat the target and you end up destroying the value because it is actually the existence of that hurdle which keeps the competition.
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