Select Committee on Transport, Local Government and the Regions Second Report


SECOND REPORT


The Transport, Local Government and the Regions Committee has agreed to the following Report:

LONDON UNDERGROUND


I. INTRODUCTION

1. The Government announced its proposals for modernising London Underground by means of a Public Private Partnership (PPP) in 1998. Our predecessor Committee examined those proposals in the spring of 1998[1] and again in spring 2000, when it published its report on the Funding of London Underground.[2] At the time of that inquiry, the first bids had been received from the private sector companies for 30-year contracts to maintain, improve and upgrade the Underground's infrastructure,[3] but the preferred bidders had not been selected. The inquiry concluded that there were some concerns over how the bids would be assessed against continued public sector ownership and, following a recommendation in the Funding of London Underground report, the National Audit Office conducted an inquiry, published in December 2000, into the financial analysis of the PPP bids. This Committee subsequently decided to conduct a further inquiry in the Autumn of 2001 when the details of the bids were clearer, but shortly before the final bids were submitted by the bidding consortia. The process for consideration of the bids and approval by London Underground Limited and the Secretary of State is discussed below. That there have been three select committee inquiries into this PPP is an indication both of its importance to the economy of London and the whole United Kingdom and to serious concerns about the Government's proposals.

2. The Government has said that it will only sign the PPP contracts if they can be proven to provide a safe Underground network and offer better value for money than an alternative public sector controlled option. The main object of our inquiry was to consider under what circumstances the PPP contracts should be signed, and accordingly whether the proposals will be safe and offer value for money. We also looked at several other matters: the complexity of the PPP; its funding requirements; and whether the PPP will meet the needs of the Underground or if it has been unreasonably constrained by the Government's view of what is affordable. If the Government decides to approve the PPP, the Committee has considered what additional conditions should be met before the contracts are signed.[4]

3. During the inquiry we were able to take evidence from almost all of the main parties involved in developing and assessing the PPP deal, including the Secretary of State. We were particularly pleased to have the opportunity to hold an oral evidence session with officials from the National Audit Office, which made a major contribution to our deliberations. Unfortunately, despite HM Treasury's pivotal role, Ministers from that Department refused to appear before us. We are most grateful to those who did give evidence to us or otherwise assisted us during our inquiry.

The problems

UNDER-INVESTMENT AND UNDER-FUNDING

4. The London Underground suffers from both "decades of chronic under-investment"[5] and erratic and uncertain funding. Long-term under-investment has created a backlog of around £1.2 billion for maintenance and renewal of assets. London Underground Limited acknowledged that uncertain funding has prevented it from efficiently planning work.[6] In addition to the funding required to eliminate the maintenance backlog, around £380 million is needed every year to maintain the network in a steady state condition.[7] Since the Environment, Transport and the Regions Select Committee's July 2000 report Funding London Underground, the Government has provided sufficient funding to ensure that the Underground's funding backlog has not grown.[8]

PERFORMANCE

5. Performance on the network has continued to deteriorate. In the year 2000-01:

  • 5.3 per cent of Underground trains were cancelled, the highest level for four years and an increase of over half on the previous year;
  • the number of train delays of 15 minutes or more was 12 per cent higher than in the four previous years;
  • nearly eight per cent of customers buying tickets had to wait for more than three minutes before they could do so;[9]
  • Signal and points failures were at their highest levels ever in the year 1999-2000.

The London Transport Users Committee described the 2000-01 performance figures as a "catalogue of almost exclusively negative trends".[10]

DEMAND GROWTH

6. The large maintenance backlog and worsening performance has occurred at a time of unprecedented growth in passenger numbers on the network. The number of passenger journeys has risen from 765 million in 1989-90 to 970 million in 2000-01.[11] Increased pressure on the poorly maintained network has further highlighted the inability of the current Underground system to meet the needs of the travelling public.

The solutions

LONDON TRANSPORT'S SOLUTION

7. In September 1997, London Transport produced a report on a dozen options for modernising the Underground. Its preferred option was the retention of the current structure of the Underground with higher and consistent long-term committed Government grant. Its second preference was to privatise the company as a whole, subject to close regulation.[12]

PUBLIC-PRIVATE PARTNERSHIP

8. The Government separately commissioned Pricewaterhouse Coopers to examine alternative plans for solving the long­term funding problems of the Underground. In March 1998, a Public­Private Partnership (PPP) was identified as its preferred option. London Underground Limited would be split into an operating company held in the public sector and three private sector infrastructure companies (Infracos).

9. Under the PPP, the private sector was invited to bid for 30-year contracts to maintain, improve and upgrade the Underground's infrastructure for the following groups of lines:

  • "BCV" — Bakerloo, Central, Waterloo&City and Victoria
  • "JNP" — Jubilee, Northern and Piccadilly
  • "Sub-Surface" — Circle, District, Metropolitan, East London and Hammersmith & City Train and station operations, signalling control and safety management would remain with London Underground Limited in the public sector.[13]

BIDDING PROCESS

10. In Spring 2000, three bidding consortia were competing for each of the contracts. Their bids, known as "Best and Final Offers", were evaluated by London Transport to identify the preferred bidder to negotiate the final bids. On 2 May 2001, the preferred bidders for the BCV and JNP lines (the 'deep tube' lines) were selected as Metronet[14] and Tube Lines[15] respectively. Bidding for the sub-surface lines was held up by the ultimately unsuccessful exclusive contract negotiations between London Transport and Railtrack described in Funding London Underground.[16] On 19 September 2001, Metronet was announced as the preferred bidder for the Sub­Surface lines.

CONTRACT TERMS

11. The PPP contracts set out a performance-related incentive and penalty scheme to remunerate the Infracos for the improvements they make to the network. The three key performance measures are:

  • availability, which is a measure of delay attributable to the infrastructure company, for example equipment failures or overruns on engineering works;
  • capability, which measures the journey times for passengers for a given line or part of a line; and
  • ambience, which reflects the cleanliness and general condition of the trains and stations.[17]

Improvements are measured against a baseline of historic performance. The Infracos will be paid £3 for every "passenger hour of benefit" they create;[18] penalties are incurred for performance that falls below the baseline levels. The infrastructure companies have a large amount of flexibility in how they choose to deliver the improvements required in order to repay their investment costs. However, London Underground Limited has also specified a number of achievements that must be met by given target dates such as station refurbishments, replacement of train fleets and track replacement.

12. The bids have been submitted for a programme of improvements over a 30-year period. The 30-year period is sub-divided into four periods of seven and a half years. The prices submitted in the final bids are only fixed for the first quarter of the 30-year period. At the end of each period, a review will allow London Underground Limited to change the total investment package or the balance of priorities across the network. At each review, the infrastructure companies present a new price for delivering the improvements over the next seven and a half years. If the two parties fail to agree on the price, an arbiter, appointed by the Government, makes a binding ruling.[19]

13. London Underground Limited is evaluating the proposed PPP against two alternatives, both of which would retain operations and infrastructure in the public sector:

  • funding provided by a combination of direct subsidy and fares income; and
  • funding by direct subsidy and revenue bonds secured against future revenue streams from the Underground. Such bonds have been used to finance major infrastructure projects in the United States for example, the New York Metro. The Mayor's transport authority, Transport for London, has developed an alternative management plan for the Underground which would establish a not-for-profit trust raising money through bond issues.[20]

ESTIMATED BENEFITS

14. The Government told our predecessor Committee that the PPP would save an estimated £4.5 billion compared to traditional public sector finance over the first 15 years of the PPP.[21] The higher borrowing costs that the private sector would incur under the PPP would, the Government estimated, be more than offset by the increased efficiency savings of highly incentivised private sector management.[22] London Underground Limited's managing director told our predecessor Committee that he did not expect the private sector to bring dramatic efficiency savings but that the advantage would come from stability of investment.[23] In Funding of London Underground the merits of all of the approaches to funding were considered and the Report concluded that "None of the proposed mechanisms of funding were conclusively proven to be better than any others."[24] In response, the Government accepted that only the final bids would provide "conclusive evidence that the PPP will deliver efficiency gains".[25]

ASSESSMENT PROCESS

15. The final bids were submitted to London Underground Limited on 4 January 2002. London Underground Limited and its advisors, Pricewaterhouse Coopers, will make recommendations to the Board of London Transport when a final analysis of the value for money of the bids has been completed. The Board of London Transport will take a decision on each of the three contracts at a Board meeting on 7 February.[26] A three week consultation period with the Mayor and Transport for London will then follow. During that period, the Government will take independent advice on the value for money of the bids from its advisor, Ernst and Young. Following the consultation, the Board of London Transport will make a final decision on the contracts, which will then go to the Secretary of State for approval. If the Health and Safety Executive concludes that the PPP will be safe —the safety test— the Secretary of State will make his decision based on the submission of London Transport and the advice of Ernst and Young —the value for money test.


1   Seventh Report of the Environment, Transport and Regional Affairs Committee, London Underground, HC (1997-98) 715-I. Back

2   Fourteenth Report of the Environment, Transport and Regional Affairs Committee, Funding of London Underground, HC (1999-2000) 411-I. (Herinafter Funding of London Underground). Back

3   The Government invited expressions of interest from major consortia interested in running the infrastructure concessions. Bidders were short listed and asked to submit bids against an agreed performance specification. These bids, known as "Best and Final Offers" were submitted in Spring 2000 for the deep tube lines and Autumn 2000 for the sub-surface lines. A single preferred bidder was subsequently selected to negotiate a final contract submission for each of the infrastructure concessions. The final bids for all three concessions have been submitted in January 2002. Back

4   See Transport Sub-Committee Press Notice no. 4, Session 2001-2002. Back

5   Q555. Back

6   Q109. Back

7   Funding of London Underground Back

8   DTLR News release 293, Byers announces an extra £416m for London Underground, 22 June 2001. Back

9   Q555. Back

10   London Transport Users Committee Annual Report 2000-2001, p23. Back

11   Transport Statistics Great Britain (2001), The Stationary Office. Back

12   HC Deb, 5 May 1998, col 317. Back

13   LU11. Back

14   Metronet comprises Bombardier Transportation (formerly Adtranz), SEEBOARD Group plc, Balfour Beatty plc, Thames Water plc and WSAtkins plc. Back

15   Tube Lines comprises Amey plc, Bechtel Enterprises Holdings Inc. and Jarvis plc. Back

16   Funding of London UndergroundBack

17   The financial analysis for the London Underground Public Private Partnerships (2000-01) National Audit Office, HC54. Back

18   Q532. Passenger hour benefits are measured by improvements in journey times compared to the historic base line combined with the number of passengers who experience the savings. Back

19   LU12B. Back

20   LU3. Back

21   Funding of London Underground, FLU12.  Back

22   Ibid Back

23   LU7, Seventh Report of the Environment, Transport and Regional Affairs Committee, London Underground, HC (1997-98) 715-I. Back

24   Funding of London Underground, FLU12. Back

25   Government Response to the Fourteenth Report of the Environment, Transport and Regional Affairs Committee, Funding of London Underground, Cm4877, October 2000. Back

26   LU12D. Back


 
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Prepared 5 February 2002