Q111 Mr Curry: My essential point is to say as a traveller and a consumer of London Underground services the fact you do not know the state of the tunnels through which the trains are running does make me feel a bit twitchy. I wonder if you feel slightly twitchy? If you had British Airways saying "We think the wings are all right, but we cannot be absolutely certain about it" would you feel a bit nervous?
Mr Rowlands: I travel on the Underground, I travel on the big railway and I am not twitchy. Mr O'Toole manages this Underground, I do not suppose in that sense he is twitchy either.
Q112 Mr Curry: Mr O'Toole, when you ran Consolidated Rail Corporation, did you know the state of the bridges over which your rail track ran?
Mr O'Toole: Yes, I did.
Q113 Mr Curry: In fact you would regard that as a normal circumstance?
Mr O'Toole: Yes, I would.
Q114 Mr Curry: Would you regard it as a normal circumstance for London Underground not to know the condition of bridges?
Mr O'Toole: I think London Underground does know the condition of its bridges. I do think it is very important that we distinguish the points here. London Underground knows quite a lot about its assets. It knows that it is safe. We do not operate assets on a guess, on a hope. We are quite clear on the safety regime we follow and why it is responsible for us to continue to provide service. What is not known here, what should be known as quickly as possible and what I would have liked to have seen done at the very beginning, is a thorough asset register that tells you the complications you are going to run in to over time as you try to rebuild these assets. I will give you two examples to illustrate this point. Once you take apart the sub surface lines, which you can walk every night, you can run inspections through it, taking analysis of it, you can know the tracks are stable and safe, but once you take it apart you are then going to learn the nature of the lateral support on those Victorian walls. It is at that point unpleasant surprises can show themselves. Similarly when you go to rebuild a station, when you tear open the walls you learn some things that are in those walls which when the deal was put together people did not know. I think that is the knowledge gap and that is why at London Underground we have been going to the Infracos and unfortunately have not had heard good noises to say: "The first thing that has to be done . . . " and you will note the thing that was not done by Railtrack was: " . . . you have to have an asset register put together". It is only then you can make an informed decision about what you really ought to be fixing first.
Q115 Mr Curry: You want the Doomsday Book of London Underground?
Mr O'Toole: That is precisely what we want.
Q116 Mr Curry: Could I refer to your own letter. These bullet points, you say "The NAO Report places great reliance on partnership issues in the section on success factors but there are other relevant success factors that might have been addressed, including . . . " and then you have got these six or seven bullet points. Had they been included, on which side of the balance sheet would they have gone? Would they have been included on the things that were being addressed or would they have been included on the things which ought to have been addressed but have not been addressed? I rather read it as on the negative side of the balance sheet.
Mr O'Toole: Certainly if you look at the NAO's Report or if you look at the Report I put out it equivocated on the conclusion and said the jury is out. My point is the parties to this deal need to be focused --- We are not in this for a relationship, we are in this to accomplish certain things and they ought to be told "This is how we will be judged" not on whether we get along. Although getting along may be good in its own right, it is not the goal.
Q117 Mr Curry: When you first arrived, and I know you will not comment on things put together before arrived, and you had a look at this wonderful landscape which you have been presented with, in polite language what was your first expression?
Mr O'Toole: That this would be an enormous challenge and I was not sure that people understood what they were going to have to live through in order for us to transform it.
Q118 Mr Curry: In any private moment did you say "If this had been the States it would have happened like this"? How would it have happened?
Mr O'Toole: Certainly Bob Kiley has had plenty of experience in handling these kinds of transformations with direct bond finances.
Q119 Mr Curry: Page 26 of this Report, just coming to that, and I guess this is for Mr Davies. It may be that my financial knowledge has slipped a bit since I worked on the FT but on paragraph 2.42 "Ernst & Young advised the Secretary of State that any potential saving from granting a public sector London Underground access to the bond markets, based on Transport for London's credit rating, would be an arbitrage saving . . . ." and therefore it did not count. Could you not have done with all the subsidy you needed? This reads to me as if you said "We are going to make sure this playing field is skewed in favour of what the Government wants to do". Here we are £825 million, which is a bob or two when you really think about it, the savings, you were not going to have them because somehow this altered the equation you were determined to present, is that not what it means?
Mr Davies: No, I do not think it means that. What this refers to, the arbitrage saving, was that one of the apparent savings, if you like bond finance is the public sector methodology for evaluating value for money, uses a discount rate different from the price of debt. The result is that it makes it more attractive than they are saying is really the case. What they are saying under here is you should be looking also at the underlying cost of the deal, i.e. not the cost of the transaction but what is happening to the cost of the assets. What is driving value for money is whether or not you believe the private sector PPP option will deliver the upgrades and the service at a lower cost not like this technical discount rate that you see in the valuation.
Q120 Mr Curry: To what extent were you influenced, also, by the need not to carry this on the public sector borrowing requirement?
Mr Davies: It is on, it is on the balance sheet, so it was not a driver in the slightest, it was only about value for money not getting off balance sheet which is often a criticism people throw at these types of transactions.