Luas Contract: Presentation.

I am pleased to welcome Mr. Frank Allen, chief executive officer of the Railway Procurement Agency, Mr. Padraic White, chairman of the Railway Procurement Agency, and Mr. Michael Sheedy, light rail project director. Members of this committee have absolute privilege but the same privilege does not apply to witnesses appearing before it. I also remind members of the long standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses, or an official by name, or in such a way as to make him or her identifiable. Will Mr. Allen commence the briefing session?

We are here to respond to the request to provide a briefing session on the contract awarded to Connex. We are happy to be here and, as chairman of the Railway Procurement Agency, I am grateful for the opportunity afforded to the chief executive to present to the members of the committee the full background to the Connex contract and I look forward to having a productive and balanced discussion.

We are here to discuss the operating contract entered into between the RPA and Connex Transport Ireland. Connex Transport Ireland was selected as the operator for the Sandyford and Tallaght lines of the Luas as a result of a competitive tendering process carried out by the then Department of Public Enterprise. It was launched in December 2000. It is worth referring to that process, the people involved and to those who made the decisions. The Department of Public Enterprise was advised at the time by Mason Solicitors, Booz Allen Hamilton and Babtie, and a selection committee comprising representatives from the Departments of Finance and Public Enterprise and the Light Rail Project Office was established to oversee the whole process. In addition, Mr. Noel Lindsay, the retired Secretary General of the Department of Education and Science, was the process auditor. A detailed process was engaged in.

Five bidders were pre-qualified to submit bids, four of which ultimately did so. As a result of this, Connex was selected by the Department of Public Enterprise in November 2001 and immediately thereafter the Department advised the Minister that Connex had provided the most competitive bid. Meanwhile, the Railway Procurement Agency was established formally at the end of December 2001, after which it went through an exhaustive process of getting up to speed on the nature of the contract and obtaining a briefing on its structure, etc. I believe there were 12 meetings in all - eight meetings of the board of the RPA and four meetings of the interim board - to review, in detail, what exactly was involved in the process that had been engaged in by the Department, which had selected Connex.

The contract, which is of most interest to the committee, is with Connex Transport Ireland, a specially established company chaired by Mr. Liam Connellan, a well known figure. It is a separate, stand-alone company engaged only in the contract with the RPA and it is a subsidiary of a large French transportation company called Veolia, which used to be called Vivendi. In addition to Connex's activities in Ireland, it is involved in public transport in about 20 countries. When the Department was considering the bidders, one of the important considerations was to establish what companies had relevant experience in establishing light rail operating contracts in other European cities. Connex had such experience in Germany, Barcelona, Stockholm and various cities in France, including St. Etienne and Bordeaux.

The conclusion of the consultants was that Connex was particularly strong in light rail projects, particularly in the early stages that involve mobilising well in terms of getting passengers on board. One of the board members of the RPA visited Stockholm to study the experience of Connex in that city. The public transport authority in Stockholm advised the RPA that, based on its experience of several years in running a similar light rail system, the out-sourcing of the service had resulted in far greater patronage, resulting in a much more attractive system and at a much lower cost. We believe this experience is relevant in terms of Connex's capabilities in running a light rail system, particularly in the early stages of its operation.

The structure of the contract, which I have reviewed in detail in recent months, is very much based on a standard operating contract that attempts to achieve a balance between penalising people for poor performance and rewarding them for superior performance. For example, there is a defined performance required for a particular period and a defined payment for that performance - that is the base case. There is a system to measure factors such as availability of service and punctuality, including, for example, whether the 8 a.m. tram leaves Sandyford on time and arrives at each of its stops at the designated time. The system also measures the availability of real time passenger information for the customers at the stops, the availability of systems safety, security operations and responsiveness to customer complaints. For mission critical considerations, such as whether the system is working effectively, the contract sets out in great detail a target of100%. If this is not reached we will impose penalties. For other matters that are not so mission critical, such as responsiveness to customer complaints, the penalty system operates differently. If responsiveness to customer complaints falls below 98%, for example, we will impose penalties. There is a pretty strong penal system in the contract so that if Connex does not perform according to very carefully defined criteria, it will be severely penalised. On the other hand, if it performs very well according to the aforementioned criteria and no penalty is imposed in a particular four week period, it will get a bonus to reward it for its superior performance. If all targets are reached, it will get a defined bonus and if the number of passengers travelling on the Luas is well in excess of numbers defined in the contract, it will get a bonus. The idea in the contract is to penalise the company if it does badly and to give a certain bonus if it does well.

We hope and expect that Connex will do well, but in contracts one has to make sure that, if a company does not do well, one has the right and ability to put things right. If Connex is unwilling or unable to perform the service it is committed to doing we have the right to step in and do the job ourselves or get somebody else to do so on our behalf. If things go very badly wrong, as defined in detail in the contract, we can terminate the contract without having to compensate Connex. There is a carefully negotiated regime to measure performance which we believe protects the passenger, provides a superior service and also protects the interests of the taxpayer, who is paying for the services.

The contract is for five years from the beginning of customer services. Connex is in a mobilisation mode at the moment and has already engaged in recruitment. Management is in place and a safety case has to be prepared which must be approved by the safety inspector before passengers are taken on board. There is a detailed regime which is set out in the contract as to what needs to be done. That is for five years, at the end of which we have the option to extend it for another five years or we can decide that we will tender it to someone else. There is no compensation payable to Connex in this regard.

In summary, the RPA is confident that we have put in place a strong contract to protect the interests of the travelling public and the taxpayer. Having looked at the experience of Connex elsewhere - I am familiar with the work the company has done in many other countries - it has the experience and capability to do this. The company has done it before well. We believe that the contract we have in place will incentivise the company to do well here too. The reason Connex is in the news at the moment is that its performance in the UK has not measured up to the circumstances. However, circumstances in the UK are quite different to Ireland. In the context of what we have looked at in light rail elsewhere, Connex measures up quite well.

I appreciate Mr. Allen's view of the contract. However, Connex's performance in regard to punctuality was very good. Any reports I read could not fault the company. It was financial incompetence which lost the company the contract. Could Mr. Allen address how, in the contract the RPA has with Connex, we make sure we do not encounter the same problems as pertained in England?

We must have been reading different articles. That is not what I understood from reports. Last year complaints were up in Connex South East by 31%. Did any discussions take place between the RPA and its counterparts in the UK, the Strategic Rail Authority? Could Mr. Allen elaborate on the points he made? What is the level of State subsidy? What does one define as something going badly? Perhaps Mr. Allen could give us an example of the types of penalties which are in place.

If Connex Ireland is a separate company to the UK company, are there any senior staff or directors of either company, past or present, concurrent members? Can he tell us if they are separate companies? Where would compensation come from if that was required at some stage by the Government? If Connex was falling short and needed additional resources, would the Government have to kick in as was the case in the UK or where would its access to resources be?

I am disappointed with Mr. Allen's presentation. He has not thrown any light on the nature of the contract other than telling us that the penalties are pretty strong. He has not told us anything about the terms of the contract and he has not allayed any concerns I have as a result of the UK experience.

What is the value of the contract which has been awarded to Connex? Is there provision for clawback in the event of the service going extremely well and higher numbers of passengers using the service than expected? Will there be a State share in it? What precisely are the provisions for penalties? Has a base line level of service been agreed? If Connex goes below that level, what are the penalties? In the event of a similar situation arising here as happened in the UK, where the company came back to the railway authority to say that the subsidy was inadequate, what can the RPA do? What provision is there for a review of the contract on either side and what contingency plans, if any, are there in the event of Connex not being able to deliver according to contract?

Unfortunately we only received the documentation immediately before the meeting. In regard to the corporate information supplied, I note that there are six directors of the company - schedule VI of part 3 of the document on page 83 of 189; the authorised share capital of the company is €100,000 and the issued share capital is two ordinary shares, both held by CGER Connex, the parent company. However, of the five directors named, none is a shareholder and only two are Irish residents. Can Mr. Allen elaborate on the experience of the individuals named as directors? The most striking aspect of the document is that pages 76 to 81, inclusive, are blacked out. They relate to insurances to be provided by the RPA. I can understand the principle of confidentiality and sensitivity but I fail to see its application in regard to the insurances to be provided, particularly where the insurance is required of the operator are fully disclosed in the contract.

Questions were asked about the detail of Connex South East. Much of what I know about what is going on is what I read in the media. I have discussed it with Connex in Ireland but we do not have detailed information about what has happened there. It is a separate company. On the sorts of issues which are reported to have taken place there regarding performance, punctuality and so forth we have a strict regime in place. If, for example, punctuality were to fall below 99% or availability fell below 98%, we would impose penalties immediately. The penalties vary according to the severity of the problem and its extent. Higher penalties therefore apply if numbers fall significantly below the set level. If they go 25% below the set level, we have the right to terminate the contract. There is a sliding scale.

At what level does the RPA have the right to terminate the contract?

If the performance inductions of an average fall below 25%, for example, we could immediately terminate the contract.

Is that figure 25%?

Does that mean a fall to 25%?

No. A fall by 25%. However, long before we reached that point, we would have penalised Connex severely. We believe that will be the effective incentive in getting the company to improve its performance.

In regard to the Chairman's comments regarding financial and other levels of incompetence, the principles have been agreed and we are putting in place an exhaustive and comprehensive auditing system to protect ourselves. Connex is taking a risk in regard to fare evasion therefore, we have a regime whereby twice a month, we carry out an audit of the service. If our inspectors find that Connex has not been checking tickets adequately - if there are people using the service without tickets - we penalise the company accordingly. For each of the provisions, the cash collected from the ticket vending machines goes straight to an account under the control of the RPA. The cash is collected by security and goes straight to a bank account under our control, so opportunities for financial irregularity do not exist. For each of these structures a detailed auditing system is being put in place. We believe that the contract we have provides very good protection.

Maybe I am incorrect, but is Mr. Allen saying that the RPA has not considered what happened in the UK even though the contract was lost? It sounds as though the RPA has a very good contract, but does Mr. Allen not think the RPA should find out exactly why Connex has lost this contract rather than just reading it in the papers, which is what we have done? It sought £50 million last year and is seeking £200 million now. Why? Perhaps it had a similar contract to the RPA.

Connex does not have the opportunity under any circumstances to seek additional money from us under the contract. Our protection is under the contract rather than being related to what may have happened in the UK.

Does Mr. Allen not think it is worthwhile to go and see why this happened?

We are certainly interested in what has happened there. However, it is a separate company. I have discussed this matter with Connex Ireland. Connex is disputing some of the claims made by the Strategic Rail Authority. This only happened on Friday last - we will certainly find out more about it. I must point out, however, that the relevance to our circumstances of the privatisation of an existing British Rail service which had been experiencing much difficulty to begin with is far less than, for example, the experience of Connex in getting a light rail system going in a city such as Stockholm, which was looked at in great detail.

There were further questions relating to circumstances in which Connex runs short of resources or seeks further compensation. The resources it will have under the contract will be what we pay it. If it gets into financial difficulties because it is not managing its affairs properly, there is the opportunity of immediate termination of the contract; for example, if the company becomes insolvent. Failure to make payments of any amount above a very modest level - tens of thousands of euro - is also a reason to terminate the contract immediately. Each of the circumstances that could give rise to financial irregularities result in an opportunity for us to terminate the contract with no compensation payable to the operator.

Our focus is on the contract we have. When I hear about difficulties with public transport operations in the UK, my response is to look at the contracts we have in place and investigate whether we are well protected under those circumstances. I believe that the contract we have is a very strong one in terms of protecting us in the sort of circumstances that have been mentioned.

Deputy Shortall asked about the value of the contract. There is a defined level of service: a frequency of five minutes between 6.30 and 9.30 a.m. and 7.5 minutes after that is provided for in the contract, as is the number of trams and the amount of time the journey takes - 22 minutes from Sandyford to St. Stephen's Green and 43 minutes from Tallaght to Connolly Station. All of that is defined and if all the factors are added up a notional number of kilometres per year is arrived at. The actual number of kilometres travelled per year is measured electronically and recorded by the control centre in the Red Cow area and this is audited on a regular basis. The calculation of payments being made to Connex is based on any difference between the required number of kilometres as set out in the contract and the actual number of kilometres travelled.

My question was about the value of the contract for the defined level of services.

The defined level of service is worth approximately €20 million per year. It is subject to some indexation and there will be adjustments in the early years, but that is more or less the base level. Deductions are made according to the criteria I mentioned, such as delays in service. The maximum amount for deductions is approximately €7 million per year, so if Connex is performing very poorly it will be in serious financial difficulties because of the penalty regimes we have put in place.

Will a share come back to the State in the event of good performance?

Yes. There is a bonus for Connex if the number of passengers exceeds a certain level. When this happens the revenue is shared and we get far more than Connex does - I do not recall the percentage, but it benefits us more.

Is that scheduled in this documentation?

Yes. It is not really a clawback; the revenue is ours. When the revenue comes in it is transferred immediately to our bank account, after which we pay Connex the amount to which it is entitled which consists of the notional amount, deductions based on lack of performance and bonuses for superior performance. All of that is set out in detail and according to various formulas in the contract.

What happens if the subsidies are inadequate? By its nature it is not a question of subsidisation. The calculation of the amount due to the operator is worked out by the formula I have outlined. If that is not enough for Connex to pay its bills, the ultimate result is that it runs into financial difficulties. If it becomes insolvent as a result of that, we can terminate the contract. Financially, it is a problem for Connex if it is not achieving the revenues it anticipated. Either it supports itself or it cannot. We then have the opportunity to replace it. We can step in ourselves and operate the system for a while if we wish, or we can immediately begin the process of finding a replacement operator. That is very clearly defined in the contract.

Does Connex have the right to a review of the contract?

No. We have agreed terms for five years. The patronage risk - based on the number of passengers - is not a risk Connex takes on the downside. It is paid for providing a superior service. It is paid more if passenger numbers go up. If patronage comes down by a lot, that is a risk that the RPA takes under the terms of the contract. The structure of the competition was decided in 2000 by the Department of Public Enterprise. The idea was that for the first phase of operations over five years, given the uncertainty about the level of patronage, the system should be guaranteed to work very well by rewarding the operators accordingly. For subsequent phases the opportunity would be provided to revisit the system and restructure if necessary so that the operator would be obliged to take patronage risk. That would be much more acceptable because there would be a track record after five years. There is no opportunity for review before then.

When does the five years start?

From the beginning of commercial passenger operations. Deputy Glennon asked about insurance. My own photocopy is not very legible - it is not a question of confidentiality. I will have the documentation done up again in a way that is more legible.

Mr. Michael Sheedy

The document implies that the obligation rests on the agency to provide insurance cover to the operator but that is not the case. It refers to the insurance the agency currently has in place to cover the construction and commissioning phase and it is a level of comfort that Connex can rely upon until the operation commences. When the operation commences it is up to Connex to insure the entire operation at its own expense.

Is that inadvertent?

It is not legible in the photocopy of the document but we will send the full details of the insurance we are obliged to take out to the committee. Confidentiality is not an issue.

Corporate information about the directors was divulged when Connex entered the contract. There are two Irish residents who are directors, Liam Connellan and Richard Dujardin. Mr. Dujardin is the chief executive of Connex Ireland. Mr. Harrison Mee is no longer working with Connex and no longer a director of the company. They were the directors who were in place at the beginning but Connex is entitled to change its directors. There are controls over change in ownership of the company but Connex, owning an 100% Irish subsidiary, is entitled to appoint the directors it believes have the experience and competence required to manage that. It is at its discretion and it would be inappropriate for us to control that.

Are any of these people involved in Connex UK?

I do not know. Mr. Harrison Mee apparently was but he is no longer with Connex. There is a further director, Chantal Estragnet, who lives in Britain.

Is Mr. Harrison Mee no longer a director of Connex Ireland and has he severed his links with Connex UK?

I can confirm that he has severed his links with Connex UK but I cannot say if he has resigned from the board here because I have not checked the records recently. If it is a 100% subsidiary of Connex, it appoints its own people and if those people leave Connex, they leave the subsidiary companies. I do not know if the paperwork has been done.

Is Richard Dujardin the only executive director?

Yes. There was a suggestion of concern that none of them is a shareholder. That would not surprise me because it a 100% subsidiary of Connex and it would be unusual in establishing a special purpose company to enter a contract here that the directors would be shareholders.

I do not know the current level of capital in the company. In establishing a special purpose company such as this to enter into a contract, the standard practice would be to do it at the minimal level and, as the company ramps up, to increase the capital. It could be asked if the expectation of ramping up is sufficient comfort for us. In addition to this, in one of the other schedules, there is a guarantee from the parent company and there are performance bonds which are underwritten - by AIB Bank in one case. We are not, therefore, dependent on the capital structure of the special purpose company. If we are looking for financial security, we are looking to other ancillary corporate bonds that are in place - performance bonds and guarantees.

The structure of these contracts would be that the form would be agreed and then there would be a period during which Connex would be obliged to put those in place and it has done that. The real financial support that is necessary comes from a parent guarantee from bonds. We are not dependent on the capital. It has been capitalised more in the meantime because it has ramped up its activities by taking on staff but that is a matter for Connex itself.

I thank Mr. Allen for being so frank. The paid up share capital worries me. What is the value of the parent guarantee? We should know the figure. This is a €20 million per annum contract so we are entitled to know the value of the bond provided to guarantee service by the parent company. We should also be told about the enforceability of that bond.

I am worried also about the performance and passengers carried. What number has been set as a minimum to fulfil the obligations, at what level does the extra kick in for the company and at what level does the penalty kick in for the RPA?

This is a five year contract which the RPA has the option of renewing without going to public tender. Is that in the best interests of the public or of transparency and accountability? To leave that option without a clear cut decision to go to contract again will not sit comfortably with the public because it suggests a cosy arrangement with Connex.

It was stated that the parent company operates in a number of locations but the main operations are in France. Was there any consultation with the other groups for which it provides services prior to the recommendation being made by the Department of Public Enterprise or did the RPA make a recommendation to the Department having examined the tenders?

I am not concerned about the contract because, from a cursory look, it is very detailed and Mr. Allen spoke in detail about the level of comfort in it. I am sure it was negotiated in the best of faith.

My concern is moving forward. Things have changed with the image of Connex and that is a concern for the RPA and for us. I do not agree about it being a separate company. It is separate in terms of the provisions set out here but Connex Ireland was not awarded the contract on that basis but on the experience it had in other countries.

It is incumbent on everyone to ensure that the culture that has developed in Britain does not develop here. I am sure those evaluating the tender looked at England but were not aware that a problem was about to arise. Protective provisions notwithstanding, the RPA does not want to arrive at the situation that exists in Britain where the contract had to be terminated. There would be little point saying two years into the contract that we are very well protected having fired the company. That would not do a great deal for the confidence of the travelling public.

The RPA must be in a position to ensure that whatever culture has developed within Connex in Britain does not develop here. The British had the same comfort in the contract - obviously they did because they terminated it. It is worrying that this has happened at this stage and it would be normal to ensure the same thing does not happen here. It has obviously been foisted on the RPA and it is not necessary for us to go back through the contract. It is more important to see what the RPA intends to do to ensure that the same thing does not happen here.

Some of my questions dovetail with questions from Deputy Ellis. We have talked about obligations under the contract. It is predicated on the parent company guarantee in the first instance and the performance bonds backing that up. Could Mr. Allen elaborate on the nature of the performance bonds, their worth and their length? Presumably, it is five years. The RPA mentioned AIB.

The French parent company providing the guarantee is connected with Vivendi but a guarantee is only as good as the guarantor. Can the RPA elaborate on the extent of the financial investigations of the parent company guarantor? I am not sure what the connection is but Vivendi has had international difficulties. Much of the contract, quite rightly, is performance related. I compliment whoever outlined those parameters.

I did not find out exactly who decides the level of performance. Mr. Allen referred several times to what would happen if the RPA was not satsified or if it decided that the contractor had not reached a certain level of performance. If that judgment is disputed by the contractor, which inevitably it is in these cases, does it go to arbitration or litigation, or is there an independent arbitrator to decide whether the operator is reaching those performance levels?

Does the operator have the power under the contract to assign? I know it cannot change the ownership of the company. How much did it cost to put this contract in place?

Deputy Ellis asked about the bonds. There is a performance bond of €10 million in place, which is adequate in terms of annual payment of approximately €20 million, and the opportunity to take decisive action in a short time.

Is that the bonds?

Yes. It is important that people understand that Connex is not taking the risk of patronage, the "fare box risk" on the downside. If the number of people travelling on the Luas is lower than expected Connex still gets paid under the structure put in place by the Department of Enterprise, Trade and Employment. That is related to the point about the five year duration. The RPA was not involved because it did not exist at the time but my understanding is that this gives a reasonable start-up period to see how the project gets going. The first two years were probably a bit short; in order to attract interest from international and experienced people it is necessary to give them the opportunity to get a return on their investment over a number of years.

The contract is balanced to protect us and the people who are mobilising and committing resources, and getting established. Five years is a short period whereas many PPP contracts for operating rail systems run for 25 years. The short period here is to give an opportunity to get it operating at the highest levels possible, to make sure availability and performance and so on are in place and then that the RPA has the opportunity to go out and change the structure to shift some of that risk.

Can you renew it under EU legislation because of its value, without advertising it in the EU journals?

Yes. The contract is for five years, renewable for another five years so we can renew it without going to ——

Has Connex the right to force its renewal or is the option on the RPA's side?

No. We have the option, they do not. One of the incentives for them to perform well in the first five years is that they are keen to be here for another five years. Whoever put that structure in place has thought it through very well because it is a good structure. There were some questions about whether we in the RPA had discussed Connex's performance with municipalities and people in France and elsewhere before agreeing the contract. The RPA did not select Connex. That was done through processes conducted largely by the Department of Enterprise, Trade and Employment. I do not know whether the Department consulted those groups. There was detailed consultation with people in Stockholm where there is a comparable system of new light rail and the public authorities there said Connex had revived public transport in their city and reduced the costs to the municipality of doing that. We were not involved at the time so I do not know whether the experience in France was considered.

Senator Dooley asked about Connex's image. Its image is good internationally but not in the UK. Our chief concern is the company's performance in comparable systems. It is relevant that a company in the same group has had bad experience with the Strategic Rail Authority and if that was its only other experience in rail we would be worried. The company operates in 20 countries and has revenues of over €3 billion a year so we have no concerns about its financial robustness in terms of guarantees for a rather modest amount in Dublin.

The company's relevant experience is very good. We are concerned with its performance since beginning mobilisation here. We are pleased with the commitment to putting in resources, getting things going, and working with us on the safety case. Within the contract there is a regime whereby a liaison committee has been established between the RPA and Connex which operates well. There is a question about what happens if there is a dispute. There is a schedule to the contract for dispute resolution procedure.

In answer to the question about termination and whether we can fire the company, we have to operate within the parameters of the contract just as Connex does. If we were to terminate arbitrarily or for reasons that are not provided for in the contract, Connex would be entitled to compensation.

Maybe Mr. Allen misunderstood my point which was that generally in a contract there is a period in which a company has the right to resolve any breaches. It would appear that Connex did not succeed in resolving whatever breaches it had made in the UK contract. That is a serious concern. I would not be particularly concerned about a company that has a breach and runs into difficulties or has to pay penalties. Termination is an extreme measure in any contract. For that reason, it is important to find out why that contract was terminated through whatever means possible both with the UK administration and Connex. There may be a valid financial reason Connex wanted to get out of this contract.

I understand the Senator's question now and we will find out in due course what happened there. We are very much focusing on how well they are mobilising in this State and we are pleased with that experience to date.

Deputy Peter Power had certain concerns about Vivendi - now called Veolia - and their financial difficulties. It is a €3 billion company. The background to those financial difficulties is that Vivendi got involved in the entertainment industry. It was a boring, public utility company in France as the Compagnie Générale des Eaux and then hit the jackpot by becoming involved in other activities. The focus of the Veolia group is now entirely on municipal services - water, public transport and so on. That part of the business is doing well. We follow how it is doing in the financial press. In the context of their obligations to us, we do not have concerns with their ability to meet them.

On the issue of enforceability and the remedies, one the things I like about the contract is that the remedies are modest for modest breaches and, as the breaches get more serious, the remedies get more serious. If over an extended period, the breaches get much higher, there is a sliding scale. It is not a case of measure it and drop dead; it is a sliding scale and a whole range of things. To accrue bonuses, they need to perform to standard on everything. We believe that this is important. It is not just that they are operating at absolute punctuality and not taking care of passenger information or passenger responsiveness, for example. They must perform on everything. The enforceability is within the confines of the contract.

Who decides that level of performance?

We are now working at putting a regime in place. To a large extent, the systems that are in place will allows us to know automatically; at our depot at the Red Cow, there will automatic recording of the time every tram leaves and stops at every stop on the route. That is the information that is provided, and we have access to that information of course. We have the right to audit any of this information. We make sure the service works right to begin with and then we audit on a regular basis to ensure that the service is implemented appropriately.

There will be certain things as in any performance measurement regime such as subjectivity and there is a dispute resolution procedure provided for in one the schedules.

What are the costs of all this?

I have no idea because the whole selection process was conducted by the Department of Public Enterprise. That all took place before——

What are the RPA's costs in finalising this document? As chief executive of the company, Mr. Allen should have an idea.

I was not chief executive of the company at the time.

Basically most of the effort was the board's time. The board - as an in interim one - had four sessions of examining this contract; when we were established in January 2002 we had eight sessions. To ensure due process, as we were taking over a draft contract and the parameters had been established by the interdepartmental group, we had the benefit of independent legal advisers. The costs were modest.

How much did they come to?

I have not got the accurate figure.

A ballpark figure?

A figure of under €50,000.

That sounds exceptionally low. Well done if it turns out that was the correct figure.

Basically, their role was to take the board through the details of the contract over 12 sessions. We as a new board regard it as an important issue for us to have due process on something we had inherited.

I had mentioned changing ownership and balancing the change in control. It is broadly defined that they cannot assign the contract without our permission.

Can Mr. Allen clarify the number of kilometres that the system will run per annum? Will that be the system for measurement? I would have thought the reference point would be passengers. We are more concerned - be it bus, rail or cycling - about the number of passengers on the trams. What is the potential and what is the capacity of passengers on the Luas system working at full capacity in one year? What is the percentage patronage for qualification of the bonus payment? On the measurement system, Irish Rail has a punctuality measurement system whereby if they drop a passenger off ten minutes later than their scheduled time, according to them, it is on time. Can Mr. Allen explain to us that his company will not be operating such a system?

In part 3 of the report the milestone mobilisation payment schedule is laid out. According to it, the Railway Procurement Agency should have ten employees. I see from the report that the individuals' names are blacked out. Can we have the milestone payments in aggregate form to date? Does the company have ten employees as of today?

I know the RPA was not responsible at the competitive tendering process stage. Did the Department know it would be dealing with Connex Ireland and who was on its board of directors? If this information followed at a later stage, how much later?

As a taxpayer, I was concerned about this whole procedure. When the contract was being selected, I presume the history of the Connex company was examined. However, it now emerges that there are serious gaps there. I disagree with Mr. Allen regarding their good record abroad. They are currently facing a loss of $40 million in Melbourne, Australia, not to mind the fact they are looking for £58 million for a subsidy in the UK and the Strategic Rail Authority refused it. The SRA chairman, Mr. Richard Bowker, has said that he took the decision to protect taxpayers' money and passenger delivery. He also stated he was not putting any more taxpayers' money into a company in which the SRA had lost total confidence. They certainly are not ringing indictments. Mr. Peter Wood from the north-east, spokesman for the independent passenger group Railfuture, said it was ridiculous that Connex were still seen to be in the frame for the transpennine franchise. He stated that if they cannot run trains in the south of England, how can they be good enough to run those in the north of England? Passengers and the rail authorities in the UK are not a happy with Connex's performance. I am concerned how they will perform here. Connex is obviously only a subsidiary of what was Vivendi, which has suffered massive losses of something like €30 billion this year and share prices have collapsed by 80%. I wonder how the Irish operation compares overall. I accept what Mr. Allen has said about it being a changed company and having got rid of some of its problem companies.

However, I would like Mr. Allen to confirm the number of employees Connex will employ in Ireland. I have heard a figure of 190. Will there be conductors on Luas trams? Apparently it is quite common abroad to find that the trams cannot operate with drivers only. My fear is that the operation in Ireland will be tiny in comparison with Connex's worldwide operations. While one might talk about severe penalties, it is a company that can pay its former chief executive £23 million in a severance package after wiping €30 billion from the value of the company's shares. I wonder what penalties one can impose and how they will compare with the reality of the huge resources the company has available to it. As a taxpayer I would certainly be concerned from that point of view.

Looking at the milestone values, I would be interested to know where we are exactly and which milestone we have passed. If you cannot tell us today, I would be quite happy to get the answer in correspondence, but what is the expected level of patronage? On line A and line B it will vary between peak and off-peak times, but I presume you can give us an aggregate figure. That will help us in two years time to decide if we are doing well.

Where does the risk lie in running a light rail system? If the operator is not carrying the risk regarding patronage, I assume it is taking a certain amount of risk regarding fare evasion. What other risks are there? I presume that none of the construction cost risks are involved and that it concerns purely the maintenance and operation of the system. Where is the risk, and are there other methods of procuring such services? Is it now universal in every city in the world that one uses this sort of competitive tendering system or do people still use standard public procurement systems where they set certain levels and payments?

Senator Morrissey asked about the number of passengers. The projected number for the Tallaght and Sandyford light rail lines is around 20 million per annum.

So the fare is going to be €1 each.

This brings us back to one of the other questions. The intention is more or less to break even. The detail of fares has yet to be worked out, and we are in discussions with the Department of Transport about that. The Department currently has people advising it on fare structures for public transport in Dublin overall. We are participating in that work, and the level of fares will be determined through that consultation process.

The real point I am getting at here is that if you know that the value of the contract is €20 million, surely you know the value of your fares. Have you got integrated ticketing worked out? How much are you going to be giving away? If you know that the value of the contract is €20 million and that you will be carrying 20 million passengers, has that not been worked out?

As I mentioned, we have still not determined the value of the fares, for Connex on its own will not do so. That must be determined in consultation with the Department of Transport. The intention is that we will have a fare structure more or less at break-even level. That is the general principle on which we are operating. We will work out the detail of the fare structure according to zone, rebates for integration and so forth. We are in very active discussions with the Department of Transport and all the other transport operators in Dublin with respect to the mechanisms for integration. Fares policy and fare integration as opposed to the technology of getting the systems to speak to one another, are the responsibility of the Department of Transport.

Will you need to apply to the Department for fares?

The level of fares will be determined independently for the period of the contract with Connex, for Connex will not take that fare box risk. We must work out the appropriate level of fares, and that can change during the five year period. The context in which the contract is put in place is the objective of operating at a break-even level. It may depend on the number of passengers. If numbers go up, we can operate at a surplus, and there may be a wrap-up period at the beginning where we may not recover our costs. All that detail has to be worked out.

You asked whether being on time could mean ten minutes late.

No. I asked what "on time" means.

Exactly. There is a schedule, and its target is 99%. If a service is due to be at Beechwood stop at 8.25 and at Ranelagh stop at 8.35, it will be measured according to the reliability in meeting those targets. In calculating that, if they meet them 99% of the time, the target is met. If they fall below that, we penalise them.

Are those actual targets and times?

Yes, and that is measured electronically, for our control system will be recording that. It will be part of the four-weekly performance measurement scheme and payments with Connex. All that is worked out in the contract.

There was a question about the number of employees now and ultimately. There are about ten employees, with four beginning on Monday. There are approximately ten at the moment, which is appropriate to the level of service they need to provide to us. The number of tram drivers ultimately will be about 110 and there will be other employees too. Eventually there will be approximately 200 employees.

How many employees does Connex have worldwide? Is the figure 34,000?

It is 49,000.

So we are 200 out of 49,000.

Yes, though I am not sure of its relevance as a percentage. There was a question about the competitive tendering process.

The employees names are all blacked out. While I accept that you may have individuals blacked out, could you not give us an aggregate? What is the value?

Mr. Sheedy

The total mobilisation cost is of the order of €7 million; I am adding up all the individual components globally. That particular one is €140,000.

It is related to various things, such as the preparation of the safety case. It is not simply a matter of having more employees on board. They must demonstrate performance and have things demonstrated to us. It is not measured simply by the number of people on board.

What about the number of kilometres or passengers?

The structure of the system put in place by the Department of Public Enterprise was that, for the first five-year period, it is effectively an availability based system. Connex provides the service, and if the number of passengers is substantially lower than originally projected, the structure put in place when this was agreed by the Department of Public Enterprise and bid on was that Connex would not take that fare-box or patronage risk. That is the structure of the contract. Success is measured according to availability, providing the service on time and all those other criteria I mentioned. However, if the light rail system does not succeed in attracting a large number of passengers, Connex is not penalised for that. That is an important consideration. Connex is rewarded if the numbers are substantially above the projections to incentivise it to provide a good service and attract more people on board, but the structure put in place by the Department of Public Enterprise does not penalise Connex if the numbers are down. However, if the numbers are down because they have been providing poor service they are penalised. In that context it is the service that is measured rather than the number of employees.

So Mr. Allen does not known how many passengers will be carried in the five year period.

We have certain projections.

He does not know.

It could be over-subscribed.

One does market research but it is difficult to know. If an existing service is being improved from a regular bus service to a quality bus corridor, it is easier to assess the likely take-up of that. People say they will take the light rail system into town but whether they will is another matter. Market research on public transport internationally is notorious in that people say that if the service were better, everybody would be on board. The proof of that is when the service is provided. The experience is that it often takes time for that to build up. It is difficult to break people's travelling patterns. If someone has been driving to work for the past 32 years, they may say they will use public transport but they may not whereas new recruits to the public transport market are far more likely to use it. We do detailed modelling of this but it is not an exact science. In any project I have seen being structured, everybody at the table has conducted their own modelling exercises and they have all come up with different results. That is the nature of projecting public transport patronage. We work with the best methods. The Department of Public Enterprise decided to put a relatively short-term contract in place to begin with - five years - and in doing that we can see the level of performance and then decide at that stage to transfer that patterned risk to potential bidders. We can put a longer contract in place, for example, with Connex or somebody else and have a further competitive process.

Senator Browne asked about the history of the company. When the selection and tendering process was carried out by the Department of Public Enterprise there were pre-qualification criteria which included the bidders being financially robust and providing background information about their resources. The people evaluating the tenders at the time clearly believed that Connex had the financial resources to commit to a project such as this, and that was determined by the Department of Public Enterprise when it went through that process.

On whether we will have conductors, the answer is no. There will be customer service personnel. The nature of the service will be that people will buy their ticket on the platform. They will be obliged to have a valid ticket before getting on the tram. They will not pay the driver, as on a bus, or a conductor. Connex employees will travel on the tram, although not on every tram. That will vary according to frequency of service, whether during the day or at night. They have various roles providing customer service but, in addition, they will check fares because there is a risk of fare evasion. Penalty fares will be charged on people for not having a valid ticket when they get on the tram. There will not be conductors as such but there will be customer service personnel operating throughout the system.

Deputy Ryan asked an interesting question about the risk of running a light rail system, particularly if we are not transferring the passenger risk. The answer is that there are those who are concerned that public transport is not as attractive as people would like it to be in various cities throughout the world. It is very often late, it is not clean and tidy and the passenger information provided is not adequate. The perception people have is that trains are late. Clearly there are management risks associated with ensuring that if the tram is supposed to be at the Tallaght stop at a particular time, it is there. It is a risk associated with running the service well and doing that for every tram that leaves a depot. It is ensuring that the tram stops at the precise time it is supposed to at each place along the way and that there is absolute reliability of service. What distinguishes light rail from other services is the guarantee to the passenger that he or she will not have to wait more than five minutes at a stop for that tram. That is what gets people on board. The risks associated with that are management risks, people who know how to put systems in place and motivate their staff.

In terms of the contract which I mentioned earlier, in addition to operating the trams there is a vehicle maintenance contract. We entered into a contract with another company, Alstom Ireland, to be responsible for vehicle maintenance and we have transferred that contract to Connex. There is a ticket vending machine maintenance contract, which we have entered into with another party, and we have transferred the management of that to Connex. We are currently going through a tendering process for infrastructure maintenance. Those contractual arrangements will be transferred to Connex.

One of the reasons light rail systems of public transport do not often work well is that people point fingers at one another. In other words, if it is late arriving at the stop is the fault of the maintenance person, the operator or there is a problem with this or that. We brought all those contracts together under the umbrella of Connex. We selected the people who will do the work but it is Connex's responsibility to manage them. Connex cannot get off the hook by saying the maintenance people did not do their work properly. It is Connex's responsibility to make sure the maintenance people do their work properly.

It appears that the main variable, in terms of whether it is on time, given that it is on-street, is the traffic management in the city centre. Is the director of traffic under the Connex umbrella in that regard? In what way is the risk of traffic management taken into account?

An essential part of ensuring we can provide the on-time service provided for in this contract is the arrangement we have with the director of traffic and Dublin City Council in particular. That is an essential part of the structure we are putting in place. We are in discussions with Dublin City Council about that, and the principles are agreed. One does not need to have full priority at every traffic light to achieve the times that are provided for here. The nature of the discussions concern the degree of priority that is required. There are complex issues that require detailed planning by the people who are currently implementing the infrastructure and also discussions between them, ourselves and Dublin City Council, and they are going well. Dublin City Council is very committed to ensuring that light rail is a success and it recognises that reliability of service is crucial in that the person who goes to the tram stop will not have to wait more than five minutes in peak hour. That is what will get people out of their cars and onto the tram. I have no doubt Dublin City Council fully understands the nature of that and is committed to ensuring it is a success.

The question was asked about the way procurement methodology is done. It is not done like that in a large number of cities around the world. The public sector has been in place for the past 100 years and it will continue to operate the service in that way. There is an increasing tendency with new public transit systems, and systems where there is a commitment to get more people out of cars and onto public transport, to mobilise the resources of private companies and incentivise them to do it and to bring the experience that has been successful elsewhere to the new systems.

For most newly launched light rail services throughout Europe in particular, the approach adopted in bringing in a private contractor would be fairly standard. In many places, rather than have one company build the infrastructure and then hand it over to an operator, the operator is part of the consortium that would build it. For example, in Barcelona Connex was part of the winning consortium that put the contract in place, and it has an operating contract there for 25 years. From the beginning of operations it will run light rail in Barcelona for 25 years. That is a modification, a variation on a theme. The practice is that for new light rail services an approach such as this is quite common.

Mr. Sheedy

We are approximately at milestone 25. We retained flexibility when the contract was being structured so that the operator would be required to match the ramping up of his resources to suit the start date rather than an assumed start date.

It is on page 48 of No. 3. It has been updated since the last general election. I presume those dates were not in place when the advertisements for 2003 were placed. Did we know these dates before the last general election or has there been a recent update?

Mr. Sheedy

The documentation was put together some time ago when there was less certainty about the completion dates. In view of that, we considered it wise to retain the flexibility within the contract to put the onus on the contractor to respond to a three month notice period of commencement of service. He has adjusted his ramping up to accommodate the actual date of service, as projected.

I am sorry for my late attendance but I had to launch an archive in Dublin, something I had agreed to do some time ago. While I missed some of your contribution, I compliment you on your clear and open presentation. It is very important to measure the number of passengers, which would be of more interest to me than the number of kilometres.

God bless your optimism if you think nobody is going to be left waiting more than five minutes. The trains travelling on the Skerries line are already full at Skerries. Capacity is one of the problems. The present system does not have adequate capacity which is why the metro is vital. I am sure that trains will continue to be full after about one third of their journey time, as is happening under the existing rail system. Perhaps I am wrong about that.

The frequency of reference to the former Department of Public Enterprise indicates a certain unease in that you are suggesting that there is a cut-off point before which you are not responsible. It suggests you are seeking to argue that you took over a situation. You have my sympathy in taking that approach.

I am happy with your explanation that blanks in the presentation are the result of a printing error. It reminds me of "Tristram Shandy", which contains a number of blank pages. However, a number of things have been deliberately blacked out on the basis that it is commercially sensitive. Your board contains a number of shrewd businessmen and there are people attending with you who have a lot of financial expertise. I imagine that good operatives would quickly know if they were competing. They would have ways of finding out. It suggests that the blanks are in place to prevent the members of the public from knowing. If that is not the case, the only reason for concealment because of an open competition to be held in five years is that you are convinced you can get a significantly better deal. It suggests that the current agreement is not the best that could have been secured, which is why we are all interested in the figures. I hope we will be able to get them.

We are measuring the number of passengers. Connex would not be taking the risk that there is a lower number of passengers.

Sitting suspended at 8.55 p.m. and resumed at 9.15 p.m.

The witnesses will be glad to hear that, on the Order of Business in the Seanad this morning when this issue was raised, Senator Mansergh sprang to their defence and said that, with regard to Connex, there was a significant difference between running the spanking bright new system here and running the decrepit, old, ghastly and illogical system in England. Perhaps the witnesses can answer for me and allay concerns because it is in the public mind and is frequently stated and printed, whether there are different gauges on the two lines, if they are incompatible and if the vehicles are different and cannot be interlinked. It would be useful to know whether this is accurate. It would be good were it not.

One of our functions today is to push the witnesses to obtain as much detail of the financial aspects of the contract as possible. While I accept that the witnesses must perform their watchdog role in defending the confidentiality of the contract, I believe we should be in possession of the detail. In this respect, the figures for the demolition of the ramp at Connolly Station as a necessary part of the construction of Luas - I regret its demolition because it is an interesting Victorian construction - are given as €30 million and €60 million. Are the witnesses able to furnish information on the cost of this?

Much that I wanted to ask has already been asked and I do not want to be repetitious because it is late, stuffy, hot and so on. Having looked quickly through the documentation, the second paragraph on page 157 in the section described as "commercial plan" is extraordinarily revealing. It states that, by ensuring tourist offices and tour operators know Luas and understand what it is, the aim over time must be to reach the point where the tram service is as well known by incoming tourists as the tube in London and the metro in Paris. Is that not revealing? The light rail is being compared with two successful enterprises that are underground, namely, the tube and the metro. Would it not be a good idea to promote the metro? We are stuck with Luas, and the decisions in this regard were made by the former Department of Public Enterprise which we can blame. While Luas must be made operational, we should concentrate on that which will transport the right number of passengers, namely, the metro. I find the comparison very revealing.

What discussions have taken place with the witnesses' counterparts in the Strategic Rail Authority regarding the operation of Connex in the United Kingdom? While I accept that South-Eastern Connex only went into serious difficulty and hit the headlines last Friday, it had to be bailed out late last year. Connex also lost another of its franchises in the UK, namely, the south central franchise, in October 2000 prior to the signing of contracts in Ireland. Will the witnesses elaborate on discussions they have had with the SRA in the UK in this regard?

Will the witnesses give an example of the type of penalties to which they refer? If trams on the Tallaght line, which should take 42 minutes to travel to the city centre, take on average 47 minutes during rush hour or 53 minutes, which is more than the 25% tolerance, what penalties will be imposed?

On the connections between Connex UK and Ireland, the witnesses said in response to another question that a Mr. Harrison Mee is a director of Connex UK and a former director of Connex Ireland. Will they elaborate on the other members or directors of Connex Ireland? Has any of them been or are any of them directors of Connex UK? The possible connection is a key issue.

If Connex Ireland loses the contract, what protection if any is in place for the staff who would have been employed by the company? I know certain conditions apply in the UK, so what is the position here? We have the contract in front of us, and in Part 3, pages 46-8 cover the key milestones to the opening and operation of the system. I note milestones Nos. 32, 33, 39 and 40 are not considered key milestones and I seek elaboration of that point. Also, the delegation should furnish the committees with the up to date dates for the milestones, as naturally this is now out of date.

Perhaps I misunderstood Mr. Allen earlier when I asked him about the start date of the contract. He said it was when the system became operational, and according to this the system is due to become operational on 24 March 2004. The latest prediction is August 2004. What happens in the intervening period and when does the €20 million per annum payment start?

What is the cost of the mobilisation grant, as it is referred to here? What have all the milestones cost us to date and what will be the cost of the period between the end of the milestones in March next year and when the system gets up and running? If there are further delays what are the penalties for the State?

What is the estimated take from fares over a five year period in which it is fully up and running? What are the estimated passenger numbers and take from the fares for the fifth year? Who will set the fares?

Senator Norris asked about the number of passengers, which we will of course be measuring, and what would happen if we reach capacity early. There are opportunities to increase capacity, some of which can happen easily by increasing service frequency. There are implications for traffic management. A five minute service being increased to a four minute service has an impact but technically the system can increase frequency to every two and a half minutes. There are implications for traffic management there which we would have to examine. There are also opportunities in lengthening the trams. The 26 trams on the Tallaght line are 30 metres which can be increased, while the Sandyford trams are 40 metres. We are not considering going beyond that but increasing from 30 to 40 metres is technically very easy. One would order the new——

Doing both would certainly create further traffic obstructions.

Lengthening the trams would not really add to traffic obstruction; increasing the frequency of service certainly would.

The second one may be marginal.

It may be marginal.

If one is sitting there extra carriages mean extra seconds of frustration.

We are looking at what steps can be taken if capacity is reached at an early stage. Choices will have to be made. If capacity is reached and huge numbers are travelling by tram that means fewer people are driving to work in the city. It is important to recognise that more people in trams means, to a large extent, that fewer people are travelling by car.

Senator Norris said he sensed unease about the selection process by the Department of Public Enterprise. That is not the case and at the start of my presentation I went through the thorough process that Department went through with advisers and a profit auditor who was a former secretary general of the Department of Education. The process was impeccable.

Regarding questions about checking various things before selecting Connex, we did not because we were not involved at that stage. I do not know the detail of whether the selection committee has asked those precise questions. I know the procurement process was impeccable. There is no distancing ourselves from that whatsoever.

Regarding the milestone payments and financial matters being commercially sensitive, Senator Norris asked if we would do better in the future and whether this meant this was not a great deal. The counterparts of the contract believe this financial information to be very sensitive commercially and requested we treat it as such. Contracts such as this are sometimes bid for competitively and the difference between the winner and the underbidder may be quite modest. Those experienced in the business might be able to produce a good estimate but that good estimate might be a little different from the winning bid and could be the difference between the winner and the underbidder. That is why this is sensitive.

As for whether we feel we might do better the next time and that this means we did not do well this time, that is not the case. I said that the risks associated with getting something going for the first five years are far greater than the risks at a later date. By then the concept and systems have been proven. There are risks in taking over new systems as there can be all sorts of problems. If someone were bidding for it now they would base their contract on having to bear those risks. Those risks are modest when there is rebidding in five years time. We hope we will do better then but the circumstances will have changed significantly. That is the reason for a certain sensitivity about the very limited amount of commercial information. The contract runs to about 500 pages and very little of that has been blacked out.

There was one article in the media last weekend which stated that the gauge would be slightly different, meaning the trams would not be interchangeable. That is nonsense. Of course the trams will be interchangeable. There is no substance to that story. In fact, we are considering whether differences in patronage will mean moving Sandyford trams to the Tallaght lines. That could be done over a weekend, when passenger numbers are lower. There are no technical obstacles.

Irrespective of length?

Irrespective of length. We have designed the platforms on the Tallaght line to take longer trams. There are no technical obstacles and the newspaper report was nonsense.

Regarding this document and the commercial plan, if one looks at the references to the commercial plan in the contract, that commercial plan is more aspirational. If one does not have the tram stopping at a certain point and at a certain time one is penalised. There are other aspects which, in developing the contract, were intended to ensure people had thought through how this was to be marketed and run. What is mentioned here is of an aspirational nature rather than a binding commitment and it is important to see it in that context. The comparisons between Luas and underground systems elsewhere are——

We are committed to developing the metro. In many other cities throughout the world - I referred to Stockholm on several occasions - there is a very good mix between metro and light rail. It is not the case that one is better than the other or that light rail is better than buses; each mode of transportation has a particular role. In an integrated transportation system, for certain routes where a high capacity is required, the metro is the way to go. For other routes an on-street service is what is needed. In terms of commercial development in the city centre, an on-street service, with approximately 600 metres between stops, is the sort of system that encourages people to shop in the city centre and so on. There are different roles and the Railway Procurement Agency is committed to developing light rail and metro. Where we believe the light rail system is the appropriate solution we push hard for light rail and where we believe the metro is the appropriate solution we push hard for the metro.

Senator Norris's last question concerned the demolition of the ramp at Connolly Station. I am not sure if the Senator has seen the artist's impression of the canopy structure in the plaza. This will enhance the plans for Amiens Street which Dublin City Council has been encouraging. The people in Talbot Street and that whole neighbourhood have been saying it will open up that part of the city.

What will the cost be?

It will be nothing near the figures quoted. We will be coming back later in the month to deal with property acquisition issues.

I thank Mr. Allen and I appreciate the clarity of his answers.

Deputy Naughten asked about our discussions with the SRA. I know SRA well because I have dealt with it on many occasions in the past in terms of financing light rail franchises and so on in the UK. I am aware of the difficulties with heavy rail franchises. I have not spoken to the organisation since Friday about what has happened. I have spoken to the SRA on many occasions about various issues relating to franchisees and private companies.

Including Connex?

Yes. We will speak to the SRA about what has happened.

Forget about last Friday. I accept you could not have turned around matters that quickly. Has Mr. Allen spoken to the SRA about the bail out last December and the south central franchise which was terminated in October 2000?

I did not speak to the SRA about Connex and the financial support it received. Connex's south central contract was not terminated. The arrangements in place were similar to the arrangements over a five year period. I do not recall the exact duration of the contract. The franchise period under the contract expired - there is an expiry date. The SRA conducted a bidding process, as it does in all cases and, in this case, Connex and others bid and someone else won. If at the end of the contract we conduct a competitive process and select a different operator, that does not necessarily mean Connex had been a failure for the five years but that someone else came along with a better bid. South central is not a terminated contract. It expired according to the terms of the contract.

On the connection between Connex UK and Ireland, I have not previously heard of the names on the list of directors. They have not had an active involvement.

Can we guess that three of the five would have been former members of Connex UK?

I do not know. I know, however, that the managing director of Connex Ireland was not involved with Connex UK. A recently recruited contracts manager was brought in from Connex in Germany. I do not recognise the names. The people we deal with at an operational level have not been involved with Connex UK.

Would that give rise for concern? You made the point in your correspondence that Connex Ireland is a separate company. Would Mr. Allen be surprised if three of the five directors were former directors of Connex UK?

I do not know. Others were directors of the company at the time and I do not know their involvement. They have not had an active involvement in operations here. I know the staff and the chairman of Connex Ireland had no involvement but I do not know whether the others were involved in Connex UK. When we deal with Connex people outside of Connex Ireland, we deal with Connex Paris. When specialists are brought in to advise on issues such as revenue protection and so on, they are people with experience of light rail projects elsewhere. That business is managed out of Connex Paris. Endurance running people are being brought in from Sweden. Other Connex people who come in for consultations and various meetings are based in either Paris or Stockholm. There is a lot of interaction between the project here and the one in Stockholm.

The equity, including responsibility to ensure that the company does not collapse, will be the responsibility of the directors. Would it give rise for concern if it were the case that three of the five directors had been former directors of Connex UK?

Not necessarily. We do not control who Connex appoints as directors of a wholly owned subsidiary. It needs to appoint competent people and we must ensure that the work is managed appropriately. We have a protective mechanism in place whereby if that is not the case we are protected. Obviously, Connex has discretion in relation to who it appoints. We cannot micro-manage it to the extent that we can tell them who to appoint. If these people do not perform, we have a responsibility to impose penalties. Under the contract, Connex has rights and obligations. It has the freedom to do certain things. As long as it performs, who it appoints as directors to Connex Ireland is their responsibility.

Deputy Naughten asked about protection for staff if Connex were to lose the contract. That would be provided for under the so-called transfer of undertaking rules.

It is similar to the UK.

Yes. The Deputy identified key milestones. I do not know the detail so perhaps I will refer to them again. What were the key milestones?

Nos. 32, 33, 39 and 40 were the trial runs on lines A and B.

Have they been referred to in the contract as not being key milestones?

That is correct.

Where was it referred to?

On pages 47 and 48, 189 on part 3 of the contract.

I see the milestones. Is the question whether they are key milestones?

At the top of the table it says, "Is milestone a key milestone Y/N" and "N" is beside those four.

I do not know the significance of that. Clearly they cannot move ahead with subsequent ones without having achieved those.

Mr. Sheedy

They cannot achieve subsequent milestones without delivering the predecesssors; assuming they have a "Y" is critical.

Assuming they have achieved the predecessors, would they not then be key milestones?

Mr. Sheedy

They could skip a non-critical predecessor to achieve payment against some of the subsequent milestones.

Deputy Naughten's last question concerned the magnitude of the penalties. Mr. Sheedy may deal with that.

Mr. Sheedy

As a critical example, if the journey times are not achieved what are the penalties? In broad terms, the penalty is more severe at peak hours because that is when delivery of service is critical to the travelling public. In that instance, on average, for every minute delay outside the scheduled journey time the operator will be charged €20 for every tram. If a tram is five minutes late it will cost the operator €100.

If I may turn to Deputy Shortall's queries, I will clarify what I meant when I said the start date would be five years from the beginning of operations. The contract became effective when it was signed in May 2002. Certain conditions were put in place and became effective very soon thereafter. The five year period is five years of operations. That will begin next year.

What is the operational period?

There is a whole scheme in place. Connex is in a mobilisation phase at the moment and is being paid milestones according to——

We want to know how much they are being paid for each milestone. Can Mr. Allen provide those figures?

The total payment to date is approximately €3 million.

Mr. Sheedy

Up to milestone 26 or so. It is of that order, on a quick summation.

After 24 March next year what happens regarding the €20 million annual payment?

The payment mechanism I described earlier is related entirely to the operating phase. If, as has happened here, that date has shifted the €20 million does not become effective from the date in the contract. We have flexibility under the contract, as long as we give adequate notice to Connex, to move those dates. The payments being made to Connex relate to the period in which they are in operation and not the mobilisation phase.

What are the revised dates for commencement? Is it August?

For operation of the Sandyford line the date is June and for the Tallaght line it is August.

What will Connex be paid between March and August of next year?

The payment regime depends on the service and on whether one line or two lines are operating at a particular time. While line B is operating and line A is not, Connex will be paid for line B.

If neither line is operating?

If neither line is operating they are not paid the availability fee.

What will they be paid as of 24 March next year until such time as the system becomes operational?

Mr. Sheedy

We do not incur a penalty in the mobilisation charges because of any slippage or variation in the start of passenger service.

There is the cost of employing the staff including the drivers, who will be doing nothing.

Mr. Sheedy

The obligation is on Connex to structure their recruitment of staff so that they do not have them sitting idle. We give them three months rolling notice of the start-up of service date and it is their responsibility to manage the recruitment of staff to match the actual start-up date. It is their risk.

Excuse me if I am not taking this in properly. According to this, 75% of drivers will be employed by December next. Who is going to pay those drivers' salaries until the system is up and running?

Mr. Sheedy

There are two aspects. First, the overall mobilisation costs to the agency from Connex is of the order of €7.5 million. That is an approximate estimate. As long as we keep Connex advised with a three month accurate prediction of the actual start-up date we have no increased liability. If there were any slippage in the start of passenger services we do not increase our exposure on mobilisation charges as long as we give three months notice of the start-up date. The only exception is that we have decided that it is to our benefit to get the trams we have commissioned and accepted from the supplier out and running up miles so as to shake out any problems and increase the reliability of the service from day one. As a variation on the contract we have asked Connex to supply additional drivers to us at this stage and four are coming from Sweden next Monday to keep the trams running and shake out any potential problems. Other than that, as long as we give Connex three months notice of the actual start of service date we have no increased exposure on mobilisation charges.

It still costs the taxpayers money every month the scheme is delayed.

Mr. Sheedy

No, because we are telling them not to ramp up too early, not to recruit drivers who are sitting there waiting for the service to start, and to build them up in time to start a full service on line B in June next year.

You have to pay them for keeping to these milestones, do you not?

Mr. Sheedy

We are saying they must adjust the milestones. They are not absolute. They were indicative to allow them price the mobilisation. Our current estimate for start of service is June of next year and the milestones are to be synchronised with that actual start date.

Can the RPA furnish us with the up-to-date milestones it is working with at the moment? I thought we were talking about real times here given that they are in the contract.

Mr. Sheedy

They are not. They were indicative at the time.

Are they not binding?

Mr. Sheedy

For instance, some of the milestones would be beyond the control of Connex. Some of the milestones are the number of employees recruited by Alstrom, who are carrying out the 15 year maintenance contract on the trams.

Could Mr. Sheedy forward the revised schedule for the milestones?

Mr. Sheedy

I will be happy to do that.

Deputy Shortall asked about estimated numbers and who sets the fares? The Department of Transport is undertaking a review of fares policy for public transport in the Dublin area at the moment which will be of interest for buses, rail and light rail.

Under the contract who sets the fares?

You have full control of fares?

Connex has no input in setting fares. It is a matter for us and the Department of Transport.

What is the estimated fare take after five years?

At current values it is about €20 million but that will increase because of indexation or fare increases permitted over time.

The State will be paying out €20 million to Connex to operate the system. Leaving aside indexing, how much is it expected will be taken in when the system in up and running?

Approximately €20 million.

So, it is expected to break even.

And the contract is based on that.

The contract is not based on that. It is based on our making payments to Connex for availability of service. It is not tied to the revenue we receive. If we receive a lower revenue the operator is still entitled to payment for the service he has provided.

Are there forecasts and indicative figures for passenger numbers and the expected take?

Yes. The indicative numbers approximately provide for us to break even. There are important decisions to be made. For example, if the result of the Department of Transport studies resulted in fare integration, with a significant rebate moving from one mode of transportation to the other, that would have consequences for the revenue for each of the public transport operators. Our projected revenues depend on projections about passenger numbers. One can project that but it is an inexact science. The overall principle is to try and ensure that the service operates more or less at break even level. It may well operate with a surplus if the numbers measure up. There are a number of variables, some of which are outside our control.

When was this contract signed?

In late 2002.

Who was responsible for the public advertisements which suggested the trams would be running by 2003?

The Railway Procurement Agency placed the advertisements.

Did it do so knowing that it would be at least March of 2004 before the trams would run?

I was not working with the RPA at the time, but I do not think that is the case. The determination of the revised schedule was based on discussions with the contractor when he came to us in the autumn of last year.

What did he say?

We were monitoring progress and had discussions with the construction contractor about a revised schedule. That would have been after this contract was signed.

Was the actual schedule in the contract the original schedule at the time of the signing of the contract?

The RPA knew then that the system was not to become operational until after March 2004.

That was the date for contractual purposes.

Why were advertisements run saying that the trams would be out in 2003?

Mr. Sheedy

At that stage our predictions within the main infrastructure contract were that we could achieve implementation by the end of 2003. The consultants who put this together on behalf of the Department took their own view. We were not party to the preparation of this tender document.

Was it predicted that it would be more than three months ahead of schedule?

Mr. Sheedy

At that stage we were back in early 2002. The tender documentation went out in autumn of 2001 and we were only about 25% into the contract period of the construction programme.

In chapter three on page 158 I see that nearly 100,000 people will use the opportunity to travel on the system every day. If Connex will not lose out whether patronage is high or low, is it not in the nation's interest to ensure we get that capacity 100,000 which would produce far in excess of the €20 million annual fee? We should ensure that we get good patronage on the system by reducing fares, if that is what is required. At 100,000 people per day it will produce far in excess of €20 million. If that is the case, do we have enough carriages? Whose responsibility is it to order extra carriages if they are needed?

Schedule 16 is a marketing document or a sort of commercial plan that was put in place. The schedule obliges Connex to indicate how it would go about marketing the systembut it does not have the legal effect of a commitment.

From where does the figure of 100,000 come? What is the optimum capacity? So that it will not be penalised Connex says it will try and provide that every tram leaves every stop on time. If we can take it that we will have a full service, what is our optimum capacity? Is it not in our interests, like Ryanair, to fill every available seat and get people out of their cars? Connex is not liable for getting the people to use the system, only for running it. If there is no patronage Connex still gets €20 million but if 100,000 people use it every day we all gain.

Capacity is far in excess of 100,000. There is a difference between——

What is the capacity? Surely the figure is available.

It certainly is; it is well in excess of 120,000. There is no issue about capacity. Capacity constraints usually relate to the rush hour period. Capacity is high but one does not expect it will operate at full capacity in the middle of the morning or afternoon. If there is an apparent discrepancy it is that on one hand we are stating the capacity but then realistically we say that it will be busy during the morning and evening peak times but less so at other times.

What will the load factor be including off-peak and peak times? Whose responsibility is it to ensure that we get our capacity off-peak up to a level to ensure cars stay off the streets? Is it the responsibility of Connex or the RPA?

There is a joint responsibility to market the system.

Connex gets paid regardless.

Connex is incentivised. If it wants to get bonuses it needs to have more passengers.

All one can do is market the system. We will have people using the system in the morning and evening but all we can do is hope that as the system develops more and more people will use it.

My point is that we are in this for €20 million.

The key to this is the incentive. There is a built in incentive for Connex to acquire a certain level of passengers and over that level there is a sharing of revenue with us. The system is designed to encourage patronage. The essence of the contract, in terms of reliability, cleanliness, etc., is designed for a (user-friendly) reliable service. I hope there will be a terrific response from the travelling public. Real financial incentives exist for both Connex and us to increase the numbers using the system.

It will be absolute madness for people to drive into the city centre when the system is up and running. They would be nuts to do other than get a tram that will whip them to the top of Grafton Street and home again without hassle.

To provide clarity, would the RPA come back with figures on optimum capacity and an explanation of where the incentives kick in?

Perhaps it could do that at the next meeting.

Is that actually set out in the contract?

The capacity is not set out in the contract.

Is the optimum load set out?

The contract sets out the frequency and speed of service and so forth.

It also sets out when they get bonuses for carrying additional passengers. That is the point we are making.

That is right.

Where can we find that in the contract?

We want to know what the load factor is and when the percentages will kick in at both off-peak and peak times.

Mr. Sheedy

It is an average of the number of passengers carried. The load factor will hopefully be 100% at peak times. The incentive is to expand the market and to fill the valley periods. We will be encouraging nitelink services, for instance.

Where are those fares in the contract?

There is a mechanism in the contract. The base case that has been provided is commercially sensitive information. It provides for how the shadow fare is applied and the number of likely passengers and so forth.

That is critical to what we are doing.

We are not looking for this.

I suggest the committee go into private session so that we can be provided with that information.

Just to clarify, we are not looking for the shadow fare. We are asking at what stage does the incentive or the top up payment kick in?

At approximately 22 to 23 million.

Passengers or revenue?

At 100,000 or a 120,000 a day, using your figures, what is the percentage?

Is it 23 million passengers per annum?

Approximately, yes. The figure of 120,000 was maximum capacity at rush hour by my quick arithmetic. For example, with that maximum capacity over a 15-hour period, the likelihood that we have as many people travelling between 9 p.m. and 10 p.m. as we have between 8 a.m. and 9 a.m. does not make sense. To expect that Connex will attract as many people late at night as in the morning rush is not the nature of public transport. The nature of public transport is that it is very busy in the a.m. and p.m. peaks. This must be spread as much as possible and people must be incentivised to travel in the mid-afternoon. In the case of concessionary fares, for example, people are not allowed travel free in the morning or afternoon peak hours. There are ways of doing that and we are working on them.

I thank Mr. White, Mr. Allen and Mr. Sheedy for their attendance and for giving the committee a comprehensive overview of the contracts. It has been most enlightening.

If I may make a concluding comment, Chairman. From our point of view, this has been an extremely productive session. It provides us with an opportunity to set out all the detail and background to the work that has been carried out. If the committee examines the sequence of events from the launch of the competition under EU procurement rules in December 2000, to the interdepartmental monitoring and decision, it will be seen that the process was impeccable. As a new agency, the Railway Procurement Agency formally took responsibility for the project in January 2002; it was the main preoccupation of the board in the first five months of our activity. The interim board and the full board devoted 12 detailed sessions to this contract. I am satisfied that we observed due process and that the contract is a robust one.

Regarding Connex, the situation in the United Kingdom is a particular one that is bedevilled by a privatisation that was extremely untidy. Even today, there is very poor track and splitting of franchises to an extreme degree. It is fair to examine the group as a whole and the franchises they are getting.

The board went to Stockholm to make its own inquiries. My vision of what we could do in Dublin is what I saw Connex delivering in Stockholm. I saw cleanliness, reliability, customer service people on the trams and a sense of excellence. We had a private meeting with the Stockholm city transport operators and they told us privately that Connex had done an outstanding job.

Mr. Liam Connellan is the chairman of Connex Ireland. I meet him periodically. He is extremely committed to delivering a first class job.

The joint committee adjourned at 10.05 p.m. until 9.30 a.m. on Wednesday, 9 July 2003.