Kramer on the London Underground

12.38.41pm UTC (GMT +0000) Tue 11th Mar 2008

[Mar 10] Susan Kramer: At the time of the PPP, I was on the board of Transport for London. I was a virulent opponent of the PPP, which I fought tooth and nail.

I will not repeat the comments that have been made already, but I will try to add to them, because the issue of lessons learned is important. I hope that the Treasury is listening, because it carries a large part of the responsibility for how the negotiations were handled and for the consequences for London's transport system. The whole PPP negotiation was done in a very ideological context. The hon. Member for Leyton and Wanstead (Harry Cohen) was right; the Conservatives had taken the position that the PPP did not go far enough-

Justine Greening (Putney, Conservative): indicated dissent.

Susan Kramer: The hon. Lady shakes her head, but I stood on a platform day in, day out with the Conservative mayoral candidate in many venues; I can say that the Conservative party was seeking total privatisation as an answer.

Ken Livingstone had in this House voted twice for the PPP; only later was he converted to the idea that it was a flawed way to manage the future funding and structure of the tube. I am glad that he was converted. In the end, the struggle became one between London and the Treasury, and I was glad to be part of it.

The ideology set a dangerous context. It created an environment in which flawed decision making took place. Ideology overrode common sense and clear, analytical thinking. First, there was no asset register. Teams were trying to negotiate the upgrade of a system when they had no idea of its underlying condition. That automatically meant that there was likely to be a disaster, no matter what the outcome. How does one get value for money in such circumstances?

Then there was the negotiating team. I do not want to point fingers at very fine individuals, but put a fine individual in the wrong place and there is not a successful outcome. All the bidders-not just the successful bidders, Tube Lines and Metronet, but all the original ones-made sure that on their teams were world-class negotiators, whose skill and focus was to negotiate procurement contracts. The team that represented TfL-it was only nominally a TfL team; essentially, it was a Treasury-driven team-was largely made up of and driven by people with good academic and consulting backgrounds. Their skill set was wrong for taking on the kind of hard-nosed challenge involved in bids for which large amounts of money are at stake.

The consultants have been mentioned; the Treasury and the Government will have to think through the selection of consultants far more. The contract depended on successful risk transfer. One cannot discuss such a thing with people from investment banks. Such people know how to do deals; they are not part of organisations that take, carry and hold risk. They therefore do not understand risk transfer, and the same applies to consultants who come out of the various accounting firms. Such people have the wrong skill set-the Government were told that over and again, but never listened.

Kelvin Hopkins (Luton North, Labour): The hon. Lady is suggesting that the Government had weak negotiators on their side. If they had had tough negotiators, as they should have, would the privateers not have walked away because they would not have been able to make any money and the risk would have transferred to them? Did they stay in only because they knew that they could make cash and eventually walk away?

Susan Kramer: The structure was fundamentally flawed. If we negotiate with the private sector, we should be aware that it has a duty to its shareholders to get the best from any negotiation. The team that I mentioned was weak not because the individuals were poor but because they did not have the necessary skill set, experience and capability of being a fair challenge. Such negotiations are a gladiatorial contest, and the skill base has to be there.

Kelvin Hopkins (Luton North, Labour): rose-

Susan Kramer: I must move on, because others want to speak.

To give a simple example, even the most senior engineers at TfL were consulted only about small aspects of the contracts. The contracts depend totally on engineering requirements-to upgrade track, carry out successful maintenance and rehabilitate stations. The engineers were brought in only on a narrow, need-to-consult basis and that utterly undermined any ability to be effective and powerful in the consultation process. From a very early stage, the negotiation went on to having a single preferred bidder. For a chess player, that would be equivalent to handing over their queen at a very early stage in the game. Once people are dealing with a single preferred bidder, the negotiation goes downhill because there is no ability to have competitive play. That was made clear time and again in the course of this negotiation, and it undermined the ability to move forward.

Underpinning all this was an assumption that one can handle relationships and build long-term dynamic arrangements through contractual and legal documents. The negotiation led to a series of document exchanges, with 135 documents, 2,800 pages, and constant cross-references-completely unworkable on a day-to-day basis. The fundamental philosophy behind these arrangements was that they would be based on legal and contractual relationships. That has proved to be a flawed concept, and that lesson must be learned by Government.

Then came the comparison between the PPP and carrying out the work within the public sector-the so-called public sector comparator. I have no ideological objection to using the private sector, but there must be a level playing field in comparing the work of the private sector and delivery from the public sector. I believe-I am working from memory; perhaps Ministers can remind us-that a cost overrun adjustment of 15 per cent., or perhaps 20 per cent., is automatically added to the costs of any work calculated or estimated in the public sector. In addition, the Treasury went to extraordinary lengths to devise a discount rate to come up with net present values to compare between the two potential providers. The discount rate that was used was 8.25 per cent., or something very close to that, while the cost of borrowing with the Treasury at the time was about 3 or 4 per cent. It was an extraordinary number to use. Nobody who looked at it thought that it was in any way fair or rational but that it was selected, just like the cost overrun number, to bias the solution towards the private sector.

Even that did not get us to a project where one would take the private sector option, so the Treasury came up with one more concept, which was on its website for a while but shortly thereafter abandoned-that of reputational cost, which basically said that if there is major borrowing by a public sector entity, the cost of that somehow reflects the total borrowing capacity of the country as a whole, so there is a pricing impact.

It took all those factors stacked together to come out with a number that suggested that taking the public-private partnership route made more sense in any kind of financial analysis. It was so artificial, and so clearly structured to achieve a specific end, that it lost all sense of the risk involved and of value for money to the public. We ended up with a procurement that was described by one of my colleagues as one that will be taught in American business schools as course 101 on how not to procure. That is not a situation that the British Government should ever get us into again.

We have heard about risk transfer. There has been evidence from the very beginning that risk cannot be transferred in this respect. London cannot see its underground network being strained in capacity and coming to a halt. The risk will always end up resting with the public sector, and that notion must be taken fundamentally into its thinking.

It was evident that the Metronet contract was in trouble almost from day one. In June 2005-there had been many previous comments, but this is the one that I was most easily able to lay my hands on-Bob Kiley gave evidence to the Greater London authority and talked about Metronet's performance as "bordering on disaster". This was a slow train wreck, which people could see happening gradually, but the contractual arrangements made sure that it would not be possible for TfL or anyone else to intervene. The underlying standards embedded in the contract were very much driven by what the banks would finance. The banks were clear that the performance required of the private sector had to be something that a modest company could achieve on a modest day. The targets were low and the mechanisms for intervening were minimal.

I need to wind up my remarks quickly, so I shall make a couple of further comments; I would love the opportunity to share more of the understanding that we developed of these projects on another occasion. We must have some absolute parameters. Cost must not fall on Londoners, and I hope that we will get that assurance. We must have an understanding of where the Government see the contracts going. Will we be using a concession model, which I would favour over taking the process back in-house? London Overground and docklands light railway are excellent examples. We must know what Londoners will lose in the way of upgrades, such as air conditioning and all of the other plans that were laid out.

As the Government will be aware, those who opposed the PPP felt that there should be bond issues based on the farebox and on future streams of grants from Government. That concept of financing would have enabled far lower pricing and far more effective systems-splitting the financing from the concession to carry out the work. It would have put the responsibility on the body that would hold it best, and I would like to hear whether the Government will consider moving to that model in their recovery from the Metronet disaster.