Highways (Financing) Bill (Second sitting)

Douglas Lumsden Excerpts

Committee stage
Thursday 29th October 2026 Public Bill Committees

[Douglas Lumsden (Aberdeen South) (Con)]

Q We heard from an earlier panel that the operator has limited incentives for cost control and that there is a risk of taking “costs off the book without any level of scrutiny.” Do you understand what they are talking about in that?

Will Godfrey: I think “without any level of scrutiny” is something I would take issue with, certainly as I would see the arrangements working. We have had good discussions with old colleagues of mine at Ofwat about the arrangements they had, for example, for the Thames tideway tunnel. There, both the rhythm—by which I mean the frequency of reporting, monitoring and scrutiny of costs during construction—and the importance of having a dependable, expert, independent technical assurer on the costs are really important for making sure you have that right level of visibility and scrutiny. I would question the nature of unchecked costs. I am not denying that cost pressures would arise, but that is the whole point of having arrangements like an independent technical assessor.

[Douglas Lumsden]

Q Is it true that there are limited incentives for cost control? What is the incentive for the operator to keep the costs down?

Will Godfrey: I will go to both costs and schedule. There are instruments that you can bring in through a licence—such as cost-sharing rates. The point I was trying to make earlier is that you do not necessarily design a price control—at the moment, if there is a cost shock, it just goes through to end-user prices, so cost-sharing arrangements are one example. You can also bring in thresholds to make sure that the company is incentivised to remain on schedule as well.

[Douglas Lumsden]

Q If an operator in future was not making any money and was going under, who would step in? Would it be you?

Will Godfrey: Before we get to that point, it is worth bearing in mind whether there are other potential investors willing to buy out the company that is struggling. There may be particular reasons why—maybe it was not well managed or well financed. There is the potential in principle for someone to come in through normal mergers or acquisitions and take responsibility. In the event that the company is really struggling against a particular settlement, that is a challenge for a regulator to manage. There are certain provisions on the limit, where things ultimately are pushed to the point of non-recoverability, which are envisaged within the Bill.

One of the jobs of the regulator is, first, getting that first price control settlement right. As I say, at the moment that is being set by the Department, but getting that projection on the allowed cost is key—get it right at the start. Then, that rhythm of regular monitoring is really important to make sure that you anticipate that point. What you do not want to be doing, particularly with a construction project like this, is to get to that point with some element of surprise. What you need to do is keep that regular rhythm of monitoring and scrutiny, so that you can act before you get to that point that the company has nowhere to go.

[Douglas Lumsden]

Q I guess you could step in and increase the costs and have them earning more to try to keep them on a sustainable footing.

Will Godfrey: At certain points it is possible that a regulator could introduce things like cost limits, beyond which there was then a redetermination of a price allowance, but not necessarily one that was a simple “costs have overrun by CX, therefore tolls increase by the same amount.” It would not be an automatic pass-through; it would be subject to that efficiency and economy test.

[Jim Dickson (Dartford) (Lab)]

Q One of the things that has come through from other witnesses today is the need for pace on this project—the status quo is appalling for my residents but every bad for the economy and for various sectors. Matt, would you say that the need for us to pass some legislation, then have an equity competition and then appoint the funders is slowing down your work to make sure that the project continues and completes on time—and hopefully on budget and on spec as well?

Matt Palmer: We are moving at pace. The Chancellor at the last autumn Budget—not this one—announced funding to get us to private finance, and we are well into that. We are moving at pace. There is a misunderstanding that we have not started. We have very definitely started: 2,000 people are on site, we have 14 sq km of land and there is a lot of mud at the moment, I am afraid. We are moving well and at pace. Our target is to get a tunnel boring machine, which will be the largest in the world at the time, in the ground in 2028, which will line up roughly with when we go to private finance. All of that is contingent on the fact that we need the legislation through to allow us to get the equity to move on thereafter.

--- Later in debate ---

[Jim Dickson]

That is very helpful.

[Douglas Lumsden]

Q Andrew, I think you said earlier that one of the issues was uncapped cost overruns for the contractor. What is the consequence of that? Does it scare some contractors away?

Andrew Truscott: Not for the contractor; for the investor. Sorry—if I said “contractor”, I meant “investor”. Apologies. I do not care about the contractors. [Laughter.]

It is not because we do not understand and price risk; that is what we do for a living. It is just that I cannot go to my investment committee and, when asked, “Okay, Andrew, what is the maximum amount of equity you are going to put into this project and therefore what is the return you are expecting to get on it?”, give the answer, “I don’t know.” That is not a conversation—well, it could be a conversation, but it would be the last conversation I have with my investment committee.

[Douglas Lumsden]

Q What do we need to do to change that?

Andrew Truscott: Again, I am getting well over my skis, so apologies, but it is about being smart. I am not just suggesting that this all lands on the country balance sheet, whether it is the National Wealth Fund taking excess risk above a certain threshold and therefore becoming an equity investor as a consequence, but it would be sensible to be smart and think innovatively about how to cap the number, so that I can then go to my investment committee and say, “This is the amount of capital we’ll commit, with any excess being provided by somebody else in exchange for an economic interest.” Rather than trying to give answers, I would say that being thoughtful and innovative about how that cap can be constructed is definitely worth putting on the agenda.

[Douglas Lumsden]

Q But it does not drive away investors as it is just now, does it?

Andrew Truscott: I think it will.

[Douglas Lumsden]

Q Okay—so it is something we need to look at urgently.

Andrew Truscott: I cannot speak for the entire investment community, but I can repeat what I said earlier. I think we are fairly typical—I mean, we are brilliant, but we are fairly typical—and an uncapped equity commitment is almost impossible for us to write.

[The Chair]

If there are no further questions from Members, I thank the witnesses for their evidence. We will move on to the next panel.

Examination of Witness

Justin Madders MP gave evidence.

--- Later in debate ---

[Tristan Osborne]

Q I have a question on the ORR. My line of questioning is about whether the regulator is ready. Obviously we had the independent report last month. I challenged on one particular finding of that. Is the ORR ready for this challenge? Is the regulatory landscape in a firm place where we can solicit investor interest next year?

Again, speaking to the investor spokesperson today, they said that regulatory certainty was absolutely critical for them. I want to understand the operational capabilities, the engagement between the DFT and the ORR, and whether or not we will have that structure and that robust regulatory regime in place, and how confident you are about that.

Justin Madders: I am confident about that, because that is what the Bill intends to do. It sets it out very clearly. We have heard from the investors that that certainty will be a very attractive opportunity for the long-term investment we are seeking to deliver. There will be a need for some additional capability and capacity in the ORR, but I was very impressed with the evidence we heard today. It is very much on top of this, but there is much more to be done, and the Bill will enable it to do that.

[Douglas Lumsden]

Q Minister, we heard from the last person who gave evidence, the investor, that he would not be able to invest because of the uncapped cost overrun risks. You heard that as well. Would you look at it again to make changes to ensure investors are not so scared away by that risk?

Justin Madders: I am not too familiar with the factors he takes into account when investing, but my advice from officials is that the soft market testing that has been taking place has shown a lot of interest in this. He also said in his response that there would be quite a lot of people who would be looking to invest in this. That conversation is ongoing.

Having the legislation on the statute book will actually help give more certainty to investors. Clearly one of the reasons why the project has already started is to de-risk it to some extent. All the indicators I am getting are that we are putting this in a strong position to attract investment.

[Douglas Lumsden]

Q Will you not make any changes after hearing the comments today?

Justin Madders: I do not think that this is covered by the Bill anyway, but I will certainly take it away to see if there is anything to reflect on. I assure you that this would not be proceeding if there were no interest in investment.

[Mike Reader]

Q Minister, we have heard evidence that there is not a massive amount of competition for major schemes in Europe, yet competition is important to drive down the cost of capital. Do you think that the RAB model will help us to secure the best possible deal on the capital for building the lower Thames crossing?

Justin Madders: I think it will. Obviously the Treasury decision on how this is going to be funded is driving us in a direction where we have to secure private investment. I think the model gives us the opportunity to give the investor certainty over a long period. Clearly, guardrails in there will protect users as well, but as I say, the indications I have had so far are that the long-term nature of the project and the way in which it has been de-risked make it an attractive proposition.