Q101 Chairman: Can you both promise us that there will be no further liabilities to the taxpayer?
Mr Holden: We cannot promise you that at all.
Q102 Chairman: Give us an indication.
Mr Holden: We are as confident as we can be at this stage that the estimates are as good as anybody can make them.
Mr Rowlands: *** We are as confident as we can be that this project is under control. *** As I say, the forecast outturn is actually above the revised target cost, so all the incentives are there, Bechtel is at risk of having to pay out on the Cost Overrun Protection Programme and a lot of fees are also at risk.
Q103 Mr Davidson: First of all, on the point that Mr Holden made in terms of much of this having been a great success and so on and so forth, excuse us if we do not spend all our time saying how well you have done and all the rest of it; these meetings would be rather boring. All the points you are making are seen in the context of "Maybe you could have done better". I want to clarify the overall question of risk transfer because I am under the impression that, overall, a substantial amount of risk was transferred, but the Government and the taxpayer were still substantially at risk and we have ended up paying far more than might have been anticipated and paying for more than if obviously all risk had been transferred. I want you to clarify for me, if you can, this question of the balance about whether or not there are things that we ought to learn from this where, perhaps with hindsight, there were opportunities to transfer risk to the private sector that we did not take, possibly because of inexperience, and going down this road of the risk transfer in the early days we ought to be picking up for the future.
Mr Rowlands: Mr Holden had his own view, and one or two of these lessons, I think, are in Sir John's report. Since there are no journalists here, perhaps I can say looking back, trying to rest a multibillion-pound project on the shoulders of, in the jargon, a special purpose vehicle that had the grand total of £60 million worth of equity in it was probably a pretty dumb thing to do because it had no capacity to bear any kind of risk at all. Hence the difficulties in 1997 when it was realised that the original BR-SNCF forecasts were way out of line, and you might say, "Why the hell did it take until 1997?" You have to remember Eurostar did not start until 1994; there was then a fire in the Tunnel in 1996, so it was another of these cataclysmic events that nobody had forecast. It was only in 1997 it became clear that the two state-owned industries grossly over-forecast the likely ridership and at that point you could see that an entity with only £60 million worth of equity and no parent company guarantee-and none of this had been laid off back to shareholders, this was all on the shoulders of London Continental Rail-was not going to work. What we thought we were doing in the 1998 rescue was, as I said earlier, putting a real balance sheet behind it, because you have to assume and crystallise the only issues as where do you put the risk, whose balance sheet is behind it, and who can best control the risk? We did not want to put it behind the Government's balance sheet because we could not control the risk, we were not managing the project. We thought the answer was to put Railtrack's balance sheet behind it which was what happened in the 1998 restructuring process, but come 2001, Railtrack had an obligation to buy Section 1 and they were obliged to buy on the basis of the actual outturn price but could only get revenues from it on the basis of the forecast construction cost, so there was the risk shipped across to Railtrack and an option on Section 2 in the same way. Come 2001, Railtrack then got into increasing financial difficulties and what we had thought we were putting behind it was not there. We were still reluctant to put the Government's balance sheet behind it for the reasons I have explained, hence this rather complicated arrangement we have now. I think there is a genuine lesson there for projects of this enormous scale, which is I think the Government has to accept the cataclysmic risk. It is probably always going to end up with an overrun of 40 or 50% on a £3 billion project, which is a sum of money that will bankrupt most companies. What you will try and do-it is interesting coming out of this project-is to layer the risks in a way that hugely incentivise the project management to make sure there are no substantial cost overruns, because Rail Link Engineering and Bechtel are in first for the large chunk of the first cost overruns of the 300 million. I do not know about the future, it would be worth thinking about the insurance market which is where we have put a large chunk of the next 300 million. It is pretty unique in this country, it is not so unique in the United States. Bechtel came along and said to LCR and us, "We put cost overrun into the US insurance market for the power stations that we do". So in the end, we did it. As I said earlier, it was pretty expensive, it was the only option we could look at. I think for a very big project, whether it is my Department or not, you might at least want to look at that again because I think the only way to avoid in the end catastrophic overrun, which always ends up on the Government's balance sheet, is to get people in first for very chunky sums before you get to a real catastrophe. We got people in there all the way from 0 to 20% cost, all the way from 0 to 600 million. I think the lesson here is do not be naïve, the private sector will always give you the risk back if it can manage it and do not assume that people who have not got the ability to carry risks that those risks are not capitalised for.
Chairman: That is fair enough.
Q104 Greg Clark: Just one question in terms of prospective taxpayer exposure. I understand that the LCR has appointed a consortium to handle the management of Eurostar UK, and that until the end of the contract period, it is pretty much expected that they will lose £20 million a year on this.
Mr Rowlands: In 1997 prices, yes.
Q105 Greg Clark: In 1997 prices. Is that a risk? What happens if that company defaults?
Mr Rowlands: No, the Inter-Capital and Regional Railways, the ICRR, the shareholders, National Express, SNCF, British Airways and SNCB; two state-owned railways will probably not be going out of business. We do not think National Express will be and-
Q106 Greg Clark: These are liable for-?
Mr Rowlands: They are liable for it and these sums are in the range that organisations of that standing can afford to pay. They are not going to bust the bank.
Q107 Chairman: That is it.
Mr Rowlands: Can I say one other thing?
Q108 Chairman: You can say as much as you like.
Mr Rowlands: I am not sure I should say this. Mr Holden is right; railway inflation was forecast on the basis of 3% inflation. It had been running at about 6% and it was a function of activity, amongst other things, in the marketplace; you had the West Coast Main Line being renewed, you had this project. That inflation will go away for this project because it will complete in 2007, but there is an interesting question going forward about the level of activity in London and the South-East: the Olympics, the widening of the M25, Thameslink 2000, Thames Gateway. It may be that my own Department will want to look at phasing things and have to push things to the right to just get some pressure away from the supply side.
Chairman: That is very helpful.
Q109 Kitty Ussher: Can we clarify from your point of view why this part needs to be in private because we will need to be able to revisit whether to publish the transcript later?
Mr Rowlands: ***
Chairman: Thank you, Mr Holden, Mr Rowlands and Mr Fuhr.
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