Q61 Chair: That is income forgone, which is different from a penalty.
Michael Hurn: There are also liquidated damages that will arise if there is a late delivery. Very importantly, even when the trains are accepted into service, there is a performance regime whereby if a train performance is not good or deteriorates-we set the threshold at a certain number of miles per casualty- there is a deduction in the rental income due to Siemens. So they are highly incentivised, both during the construction phase and for the operational phase, for delivery. It is worth remembering that there is a long-term maintenance contract attached to this. It is not just a design and build contract; it is a long-term maintenance contract. Siemens are very incentivised to maintain a very high-quality performing product throughout that maintenance period.
Q62 Chair: I hear your confidence, and we will test it over time. So the first one will be in by when?
Michael Hurn: For the first train, assuming that the contract is awarded in June of this year-
Q63 Chair: June 2015-just at the general election.
Michael Hurn: Sorry, no, June this year. It is December 2015 for the first train arriving. Philip Rutnam: Assuming the contract is awarded June 2013, the first carriage would be December 2015. Chair: Do you want to come in, Megan? I was going to move to the PFI element.
Q64 Meg Hillier: I was going to touch on that as well. I have a couple of other questions on rolling stock. I still cannot quite understand, as a humble politician, why, if Siemens was named as the preferred bidder two years ago, it has taken so long to get here. Perhaps you can talk me through what negotiations have taken place that mean that it has taken that long to do the commercial negotiations.
Philip Rutnam: You are quite right. It has taken longer than we expected, and longer than I hope will ever happen again.
Q65 Meg Hillier: So why and what lessons have you learned?
Philip Rutnam: There are three factors I would identify. The first is that this transaction involves raising a significant amount of finance. You will recall that since June 2011 the financial markets have sometimes been in a state of turmoil, particularly in the eurozone, so the financial market conditions have, at times, been very difficult, if you recall the successive episodes of doubt about the euro, Cyprus and so on. There has been quite a lot of discussion about the availability of long-term finance.
Q66 Chair: Are you saying that people are not willing to lend to a company underwritten by the UK Government? I find that hard to believe. This is a UK Government contract. Is it that it has been costing you a bit much? I do not get that.
Philip Rutnam: I can only tell you in outline the advice that we have received. I came into this in the middle of 2012.
Q67 Chair: This is UK Government-underwritten.
Philip Rutnam: It is not just a matter of the UK Government. It is not guaranteed by the UK Government.
Q68 Chair: It jolly well is.
Philip Rutnam: Obviously the fact that the UK Government are the customer is a very important factor and is helpful, but it is a complicated, long-term piece of infrastructure finance. The professional advice that we received during 2012 often cast serious doubt on the availability of sufficient long-term finance to fund this large complicated transaction, which stands out in a European context in terms of the scale of the finance needed.
Q69 Meg Hillier: Mr Rutnam, my question is on the lessons that can be learned from that about what to do when we have a big Government project to deliver in difficult financial times.
Philip Rutnam: You asked about the causes and we identified two others. The first is that the planning process around the depots, which is very important, took longer than we expected. Michael can talk more about that. The depot at Hornsey is large and significant, so planning permission took longer and a set of planning conditions had to be worked through. The third factor was that the complexity of the transaction was greater than we expected and greater than any of the other parties involved in the transaction expected. The number of parties involved, the scale and complexity of the documentation and the range of issues to be resolved were all greater. In terms of lessons, one is: do not underestimate the scope and complexity of transactions. That was a clear lesson.
Lesson 2 is to allow for planning risk. There was a lot of thought given to planning risk in relation to the infrastructure works on Thameslink around London Bridge and other major sites, but there was planning risk from the depots, and we need to learn from that. Lesson 3 is on the availability of finance. We have been living through rather extraordinary times. It may seem calmer now, but if you remember the atmosphere in the eurozone in the second half of 2011 and early 2012, they were extraordinary times. That is an element of risk that needs to feature in our risk registers. When we are thinking about transactions like this, we need to recognise the risk attached to the availability of private finance, perhaps a bit more than we have in the past.
Q70 Meg Hillier: Talking of risk and PFI, can I first ask why a PFI approach was taken? Will you outline the thinking behind that?
Philip Rutnam: Can I ask Mike to talk to that, because he was involved in the decision? Having reviewed it, the thinking was around what will be the best value solution to getting the outcome. Michael Hurn: The simple answer is that it was policy at the time, in 2008, for privately financed rolling stock transactions. That was the private sector norm and we wanted to follow that policy.