Q101 Mr Williams: Did the convergence of a public sector comparator make the bond issue more or less viable?
Mr Callaghan: The two things are not directly connected. What happens in the convergence is that the bidders' estimate of what it was going to cost to do the work and our estimate of what it was going to cost to do the work converged because as we were talking to the bidders about what they had found from going out and about on the railway and looking at the state of the assets and as the contractual terms changed in negotiation, in order to have a like-for-like comparison you have to take the new information you have got and recalculate your comparator to compare it against this.
Jon Trickett: The people preparing the public sector comparator accepted and took on board risks identified by the private sector bid, so rather than the private sector being aware of what the PSC wants, the PSC itself was moving and the convergence was because the people preparing the public sector comparator were aware of risks being identified by the private sector. Is that not the true problem, the public sector comparator got higher and higher so it was comparable with the private sector? That is how it seems to me.
Q102 Mr Williams: Which way was it? Was the convergence from the public comparator upwards or downwards? Who can answer?
Mr Davies: I can answer. The public sector comparator increased over time but it was a wholly separate exercise and was not by the same people looking at the bid evaluation.
Q103 Mr Williams: If it increased over time and was converging, therefore, it must have been below the bidding, the private market price, must it not?
Mr Davies: The convergence means it was increasing at a lower rate than the original bids because the bidders were getting better information on the assets. The process that was happening was we were getting more asset data and, therefore, both sides were getting more accurate pictures of what the true cost would be.
Q104 Mr Williams: It is most unusual for us to come across a case where the public sector comparators have been admitted to be lower than the private sector figures.
Mr Davies: It was not lower than.
Q105 Mr Williams: Why did you say it was converging when it was increasing?
Mr Davies: Converging means both were increasing but one at a slightly higher rate. They are getting closer but it was never lower than.
The Committee suspended from 4.30 pm to 5.20 pm for divisions in the House
Mr Williams: My apologies to everyone for the long delay. We will carry on straight away. Jon Cruddas?
Q106 Jon Cruddas: I have just one final question, and that is to Mr O'Toole. You have managed to swerve around commenting on Mr Kiley's letter but can I ask you to comment on your own one to the secretary? Generally, just because this is a preliminary hearing, do you want to make some comments about, firstly, the NAO Report and, secondly, your experience of the PPP over the last year because you have made some quite trenchant criticisms of it in the last letter?
Mr O'Toole: When I came here I wanted to make very plain to the parties that my interest was in service performance, in doing what I had to do to make this work. I did not want to reduce this to a battle of lawyers, I wanted to see if I could work within this system, and we continue to do that. It has been made plain to me, from working on it day to day, this is an extremely convoluted, complex, big structure in which to work. I would say the Infracos themselves have had to come to grips with the fact that it is very difficult to drive action within this structure and that we are struggling to make sure that we are able to produce the change that you are all looking for and we are paying for on the schedule that is expected here. As we pointed out, we certainly have not had the turnaround in performance in the first year of this deal that was originally projected. We point out, also, that in all fairness you usually see this when you have a transfer of structure of this kind but this year, certainly, and next will be the proving ground because, as you pointed out, we do not get the bright shiny new kit for many years so we better improve maintenance in the near term or London is going to have a very, very long wait for a turnaround.
Q107 Jon Cruddas: Okay, but you said, also, that there is difficulty in obtaining information from the Infracos, there is not yet evidence of strong planning capability within the Infracos. You said there is little evidence of the promised innovations of new plant and equipment for the infusion of external engineering expertise. You said the power to require work to be undertaken pending resolution of dispute is not available generally to London Underground Limited. Finally, you said LUL has little or no leverage to secure changes which are required to deliver the Mayor's transport strategy and to improve customer services.
Mr O'Toole: I have said all that.
Jon Cruddas: Okay. Thank you.
Q108 Mr Curry: Chairman, having read the Audit Office Report I was inclined to wait for the video but I am trying to find my way through the prose which seem to me to have been subject to vast amounts of arbitrage from all sorts of different people. I can see from the Comptroller and Auditor General there is an imperceptible nod coming from him. Being a journalist this did strike me as having been written by a committee, very strongly, which is somewhat very hesitant of the prose, if I may describe it in those terms. It meant, also, of course, we had the time delays which have made it difficult to absorb all this. Mr Rowlands, you said something which gave me quite a turn. I came to work in London in 1970 and I have been using the Tube every since. You said "Tunnels are 150 years old and nobody knows what state they are in". Here am I travelling on the Tube on a daily basis and I rather assume that I am travelling on a safe system. If somebody had said "We do not know what state the tunnels are in, and we do not know what state the bridges are in, and we do not know what state the embankment is in"- how come we will not know for seven and a half years-I think I would have got on my bike. That is what I do now, thanks to the Congestion Charge, I have never used my car so much as now I live within the Congestion Zone. Does it not appear rather curious that millions of people use the Tube and they must make the assumption that the people running it know what they are running?
Mr Rowlands: I think this is Mr O'Toole's patch not mine. I suspect they make the assumption they are travelling on a safe system. To the extent that the state of some assets is unknown that does not mean that the system is unsafe. That is the Underground's responsibility as the safety case holder and the railway inspectorate's responsibility to police it. Where there is a problem with asset states you can, I believe, take remedial measures like putting on temporary speed restrictions, for example. It keeps the service safe even though the asset may not be in anything like an ideal condition.
Q109 Mr Curry: Should there not be a notice as you go down the escalator which is not working in any case so you have plenty of time to read it, and the notice says "Notice to passengers. We do not know what state the Tube is in but we believe it to be safe"? Would that not be fair, a notice to passengers?
Mr Rowlands: No, I think it would be unfair on London Underground who run a safe system in the face of-to repeat myself, I am afraid-assets, some of whose condition is unknown and some of whose condition is known to be less than satisfactory.
Q110 Mr Curry: It is the condition of assets being unknown. Page 17 of the first Report says: "London Underground knew that despite investigations by its own advisers, Ove Arup, and investigative work by bidders, the condition of less accessible fixed assets (tunnels, some embankments, bridges et cetera) would not be known before award of the contracts, and in some cases not before the end of the first seven and a half year period". Pretty frightening, is it not?
Mr Rowlands: No, I do not think it is frightening, I think it is a consequence of the nature of the Underground system. Some of the long life assets are very difficult to get at, like tunnel walls or embankments and other structures. They are in need of remedial maintenance and renewal. Because their actual state is unknown it is very difficult to quantify the cost of that work. That is the problem and the risk, if you like, that underlies the PPP.