Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence


Memorandum by the Rail, Maritime and Transport Union (LU 08)

INTRODUCTION

  1.  RMT is the largest Tube union representing 8500 of the Underground's 16,000 employees, including operational managers, train operators, station staff, signal operators and engineering and infrastructure maintenance grades. A third of our membership will transfer to the private sector if the Public Private Partnership (PPP) is implemented. Whatever structure is finally agreed, our members as frontline public servants will have to do their best to keep the Underground running 24 hours a day, 365 days a year.

UNDER WHAT CONDITIONS SHOULD THE GOVERNMENT SIGN THE CONTRACTS?

  2.  The RMT has been consistently opposed to the PPP and remain so. We agree with the conclusion reached by Transport for London (TfL) in June that the PPP, in its current form, is so fundamentally flawed, it cannot be modified to deliver a safe, reliable, value for money Underground. The premature selection of the preferred bidders for all three contracts means that, even if the Government is inclined to change the conditions under which the contracts are signed, it has little leverage to do so. We welcome, however, the terms of reference of your enquiry which we believe identify clear questions of public interest.

THE DESIRABILITY OF AN INDEPENDENT AUDIT PRIOR TO SIGNING THE CONTRACTS TO ENSURE VALUE FOR MONEY

  3.  There are compelling arguments for an independent audit prior to contracts being signed. Firstly the strategic importance of London Underground requires the adoption of the most optimum form of funding. The network carries more passengers than the entire national railway. It is vital to the economic, social and environmental well being of London. The importance of the capital to the rest of the country means finding the right solutions for the Underground has national as well as local implications.

  4.  The perception that the government has placed political considerations before the public interest. Since the inception of the PPP the government has given the impression the proposals should be forced through at any cost. The goalposts have been moved in a number of ways, which has undermined the credibility of PPP. The government originally claimed there would be no need for public subsidy when in fact the opposite is clearly the case; awarding Railtrack a contract and then withdrawing it; ignoring commitment to competition in the tendering process by making Metronet preferred bidder for two of the three contracts; the appointment and then dismissal of Bob Kiley as London Transport Chairman. In short the PPP has become so controversial and so much political capital invested in its success, the public will only be assured of its merits if an analysis is undertaken by a body independent of any financial, political or professional interest.

  5.  The government's original commitment to value for money has been implicitly or explicitly questioned by independent agencies. We are not aware of any independent report that has been in favour of the PPP. The National Audit Office found in their enquiry into the public private comparator that London Underground's financial analysis provided a "useful but incomplete insight in the value for money of alternative approaches to managing and funding the London Underground infrastructure". And, astonishingly, LU "did not prepare a scenario with a government—backed bond". Similarly Deloitte and Touche concluded the public sector option had been manipulated to make it look more expensive. LU's unsuccessful attempt to prevent that report being released to the public has only confirmed our belief that the whole process is crying out for impartiality.

  6.  PPP is dependent on billions of pounds of tax and fare revenues. Tax and fare payers will be locked into a 30 years funding obligation. Yet neither Parliament, the GLA, Londoners nor passengers will have any knowledge of the liability they are being asked to take on until after the contracts have been signed. Retrospective analysis of whether the PPP is a wise use of public money cannot be the best way of protecting the interests of the tax and fare payer.

  7.  An independent audit will not hold up funding for the Underground. Once agreement in principle on the contracts has been reached there is no reason why the audit cannot be undertaken during the period before contracts are actually signed. If the bidders and LU are aware their agreement will be subject to independent scrutiny this may concentrate minds to ensure that value for money is realised.

  8.  Value for money is not just about pounds and pence. As the NAO stated in their analysis of LU's public private comparator—"financial analysis does not cover all factors affecting value for money" and financial analysis is "not a pass/fail test". The suitability of the PPP must also be assessed on factors that cannot always be easily audited, such as safety, integration with other areas of transport strategy and public accountability.

HOW MUCH INFORMATION ABOUT THE PRECISE NATURE OF THE CONTRACTS SHOULD BE MADE PUBLIC BEFORE THEY ARE SIGNED?

  9.  After the agreement in principle and before the contracts are presented to the banks, we can see no reason to keep any aspect of the contracts from public view. The concerns about commercial confidentiality will not exist. The infrastructure service charge will have been agreed, the full content of the contracts finalised and the absence of any rival bidders will mean there is no need for commercial secrecy. The independent audit we have supported will require full access to the contracts.

THE ALLOCATION OF RISK BETWEEN THE PUBLIC AND PRIVATE SECTORS

  10.  Risk associated with revenues, safety, legislative and environmental changes will not be transferred. Instead the PPP's main claim is that it will privatise the financial risk of things going wrong. Yet this transfer of risk has been greatly exaggerated. If the government does not take account of the following factors, it is likely that virtually the entire financial risk will be borne by the passenger and the taxpayer, with actual liability falling on the mayor and GLA.

  11.  Firstly only 10-20 per cent of PPP finance and therefore associated risk will be borne through equity by shareholders. The remainder will be in the form of debt, which the banks will not provide unless they have guarantees it will be repaid whatever the circumstances. TfL will have to implicitly or explicitly guarantee that most of the debt taken out by the PPP companies will be paid back to the lenders even in the event that the contract is terminated due to default on the part of the PPP company.

  12.  The remaining small amount of risk that will be transferred due to failure to meet contract terms, for example by way of cost or timetable overruns is, in itself, very limited. TfL have concluded that even if the PPP companies cannot fulfil their contractual obligation they will still be advanced 90 per cent of contract payments. TfL have also argued in the event of a material failure by a PPP company to fulfil its contractual terms LU will only be able to ask the PPP Company to sell its rights. Even then the PPP Company will retain any residual profits it may make from that sale.

  13.  The government should resist attempts by the preferred bidders to use the recent decision on Railtrack to gain more favourable contractual terms on the basis of increased political risk. The Railtrack scenario also graphically demonstrates that no amount of risk transfer can mitigate against the fact that whatever happens, the Underground must always be able to run trains and if necessary bear the full cost for doing so.

THE OPPORTUNITIES TO ADJUST THE CONTRACTS AFTER THEY HAVE BEEN SIGNED; AND THE ROLE OF ARBITRATION IN THE EVENT OF A DISPUTE OVER THE CONTRACTS

  14.  The PPP appears to be largely self-regulating. If agreement cannot be reached at the review period then the arbiter will become involved. To appeal to the spirit of partnership in these circumstances is naive to the extreme. With substantial amounts of money tied up in lengthy contracts, the PPP Companies will be obliged to owe a duty to shareholders and will employ all legal resources to get the best financial settlement. Unlike other utilities, there will be no economic regulation. If changes are required the PPP companies will be in a monopoly position and will be able to dictate terms. Only the original Infraco will have the staff and management to maintain performance and as a result it is unlikely that any other entity will be able to step in and replace the infraco. The arbiter will not have a level playing field to carry out its role. It will not be able to challenge the monopoly position of the PPP Company and it will be unable to mitigate against the threat of the PPP company walking away if it is unhappy with any new terms being proposed.

  15.  The Committee should also be aware that TfL wishes to make changes to contracts before the review period, it is required to give the PPP company a years notice and these changes only have to be met if TfL agrees to additional payments.

HOW TO ENSURE IMPLEMENTATION MAXIMISES THE BENEFITS AND MINIMISES THE DISADVANTAGES OF THE PPP

  16.  As we have argued in paragraphs 14-15, the inflexibility of the PPP contracts will mean there is limited scope to obtain optimum performance from the PPP contracts However we will attempt to address the following areas.

REGULATION FOLLOWING THE SIGNING OF THE CONTRACTS AND THE EXPECTED RELATIONSHIP BETWEEN TRANSPORT FOR LONDON AND THE INFRASTRUCTURE COMPANIES; AND HOW TO ENSURE PROPER ACCOUNTABILITY FOR THE UNDERGROUND SYSTEM

  17.  The PPP contracts do not allow for regulation therefore it will not be possible to remove this disadvantage following contract signature. As financial penalties are involved for the Infraco, TfL and the PPP companies will have to explore ways to minimise the inevitable conflict that will arise between the Infracos requirement to undertake major capital works and LU's desire to minimise disruption to services.

  18.  Like the mainline railway, the PPP will involve an immensely complex set of interacting relationships. LU will sign three separate contracts with the PPP companies, which in turn will have to agree contracts with each other for the provision of network wide services. Then there will be sub contract agreements and agreements linking the consortium members and their banks. In short TfL and the PPP companies will have their work cut out to prevent the PPP relationship being a source of constant wrangling.

  19.  The complex contractual relationships we have identified above will blur the lines of responsibility and therefore accountability for the Underground. In addition neither the Mayor nor GLA will be able to challenge the priorities of the PPP companies. It is meaningless for the public sector to have responsibility for the operation of train services if the performance of that service is dependant on factors outside the public sectors control—ie the quality of the track, signal and train maintenance.

  20.  Therefore we see the PPP as replicating the problems of the mainline railway. The complex contractual relationships will encourage a blame culture rather than an ethos of responsibility. Elected representatives will be able to escape accountability for the state of the network by blaming the PPP companies.

  21.  The government has recently tried to address some of these concerns by proposing the appointment of a partnership director for each infrastructure company and approval rights over work plans. Unfortunately we fear that this will amount to little more than tokenism and window dressing. The partnership director will only be able to monitor the decisions of the PPP companies, whilst it is likely that any approval plans will only be within the overall structure of the contracts that will have already been agreed. Nevertheless we would be interested to learn at what price the bidders have charged for these concessions. We are certain that they will not have accepted any changes, which will have submerged the interests of their banker and shareholders to those of LU.

SETTING AND ENFORCING PERFORMANCE TARGETS

  22.  The Industrial Society has concluded the performance standards, which determine the Infracos incentive payments, are 5 per cent below current provisions. The PPP companies will earn the full profit contained in the Infrastructure service charge even if they provide an inferior service to that which exists today and they will earn bonuses if they achieve improvements above this low level. Clearly this arrangement needs to be renegotiated as a matter of urgency.

INCREASING CAPACITY WITHIN THE EXISTING NETWORK. EXTENDING THE NETWORK AND INTEGRATION WITHIN AND BETWEEN OTHER TRANSPORT MODES IN LONDON

  23.  LU's most recent report and accounts identified a 25 per cent increase in passenger use over the last decade. The PPP modelling calculates there will be a further 40 per cent increase over the next fifteen years. Claims that the improved efficiency of the PPP will increase the capacity of the network are difficult to believe, when, as we have already pointed out the Infracos will still be paid even if they perform below current standards. Therefore, to encourage an increase in capacity the contract performance regime of the PPP companies needs to be revised. But ultimately only new lines, which the PPP is not intended to provide, will be able to increase capacity. We welcome the fact that the Mayor and government seem to be working closely together on this issue but the process needs to be accelerated.

  24.  Unfortunately, because the PPP contracts are set for 30 years, and the Mayor has minimal bargaining power during the seven year review period, we do not see how, in the absence of a fundamental review of the contracts, the PPP can be reconfigured to be flexible enough to be meet the Mayor's statutory responsibility to deliver an integrated transport policy.

INDUSTRIAL RELATIONS

  25.  Three reports over the last decade have commented on LU industrial relations. The first, by the Monopolies and Mergers Commission in 1991, concluded that at that time there were good industrial relations on the Underground. The second, was an internal report written by LU (Dispute Review Report) following the train drivers strike in 1996 which found that 32 per cent of those asked found managements tactics "macho and inflexible". A further report, by an independent panel adjudicating on a pay disagreement, argued, "the failure to bridge this dispute was largely due to management's failure to negotiate."

  26.  During the last ten years there have been a number of factors, which we believe have had a significant bearing on industrial relations. Shortly after the MMC report in 1991, LU imposed the "Company Plan" on all the LU trade unions. The consequences of that decision still affect industrial relations today. The imposition set the tone for a more adversarial approach to negotiations by LU. The Company Plan abolished the uniformity of working hours so that since that time industrial relations have been influenced by different groups of workers seeking to re-harmonise working hours.

  27.  But perhaps the most significant consequence of the Company Plan has been the drastic fall in staff numbers. Since 1992 the number of LU employees has fallen from 21, 184 to 16, 662 in 2000. During the same period passenger use has increased by 25 per cent. Whilst this has seen staff productivity as measured by the number of passenger km per employee, increase by 76 per cent the strain on staff has been enormous. This pressure has been exacerbated by the uncertainty of the organisational changes in preparation for the PPP and the deterioration of the network due to lack of funding. In the last six years the number of assaults on LU employees has increased from 545 a year to 966. On average, operational staff have a one in ten chance of being assaulted.

  28.  We believe the PPP process has led to a hiatus in leadership in London Underground that has made it increasingly difficult to maintain normal industrial relations. In the last four years both a chairman and chief executive have left the industry. The current chairman is part time and due to leave in December. There is an acting Managing Director and, since July, LU has been without a Human Resources Director.

  29.  Of course, the two days of strike action in February and March of this year were directly related to the PPP. Our members secured an agreement to protect staffing levels, job security and conditions. We believe this is an important first stage in preventing a repeat of the widespread job cuts which has undermined safety on the National railway and by achieving some protection of conditions and jobs, we hope to ensure that experienced and dedicated rail workers will wish to stay with London Underground. The RMT deeply regretted having to resort to strike action. But the dispute also demonstrated that underground staff, in common with many other public sector workers fearful of privatisation, will seek to defend themselves if it is perceived that shareholders will be seeking to maximise profits at the expense of jobs and conditions.

  30.  We are fearful the PPP will do nothing to improve industrial relations on the Underground. There is the danger that the PPP companies will seek to maximise the efficiencies that they are expected to deliver by reneging on agreements protecting jobs and conditions. Furthermore the transfer of employees to different companies will inevitably, lead to varying employment conditions, with staff in different companies constantly seeking to catch up with each other. The PPP companies may also seek to apply different conditions between new employees and transferred staff. In short there has been much talk of the need for a unified management structure, but little thought seems to have been given to the dangers of dividing a unified work force. We have put forward, without success, possible solutions to this problem. These include LU and the Infracos agreeing to a joint body to negotiate common conditions of service or, as is currently being considered for the health service, LU staff being seconded rather than actually transferred to the private employer. We are also concerned that the PPP will adversely impact on industrial relations for those staff that remain with LU. The Infrastructure Service charge will be the first call on LU revenues and employees will understandably be concerned that this will encourage LU to attack wages and conditions.

PASSENGER AND STAFF SAFETY

  31.  Our health and safety representatives are currently being consulted on the PPP safety case under the terms of the Health and Safety at Work act 1994 and Safety Case regulations 2000. The HSE must approve the safety case if the PPP is to go ahead. The safety representatives have identified a number of areas of concern, which we feel need to be urgently addressed.

  32.  The penalty/bonus regime of the PPP will mean maintenance and renewals programmes will be driven by financial, rather than safety considerations. In this respect the HSE said they have taken independent legal advice on the nature of the PPP contracts. We do not know what that advice says.

  33.  The breakdown in unified management under shadow running and fragmentation. This has led to a growth in blame culture, a lack of confidence in, or understanding of safety systems, with procedures not being understood or used to correct affect. Non-availability of safety critical licences, Infraco managers unaware of which of their staff require licences or what those licences are for. The representatives have also expressed concern that the safety case will not take into account that the dangers of the break up of the Underground will be compounded by the widespread use of sub and sub-sub contractors.

  34.  Assurance and non compliance Under the PPP the necessity for LU to physically audit the Infracos possession of safety critical documentation and any proposed works will be weakened. Instead each of the Infracos merely has to assure LU it has undertaken it's required audits. Furthermore the representatives have expressed concern that in a number of areas LU are not complying with their existing safety case. This hardly gives confidence that they or the Infracos will comply with the mew safety case under a fragmented system

  35.  The aspirational nature of the PPP safety case. Our safety representatives have expressed concern that the safety case is a "glorified paper chase" that bears no relation to what will actually happen on the ground. That is it is a theoretical document with no mechanism as to ensure it will work in practice. In this respect, whilst the HSE will no doubt wish to present their own views to the committee, you should be aware of their comments in a letter to the safety representatives of 20 September in which they state "If it is HSE's decision to accept version 3 [of the safety case] that decision of itself does not mean the Underground is 'safe' nor the HSE has approved the PPP structure on which the PPP is based."

  36.  The Committee should also be aware that the board of London Transport, who will have to approve the safety case before it is presented to the HSE are primarily the same board who, only four years ago were asked to consider a numbers of future options for the Underground. Then the board placed the PPP fourteenth out of fifteen possible options. Their two most favourable solutions were a public bond issue or outright privatisation. The stated reason was that both these options, as opposed to PPP, retained the Underground as an integrated, vertical and unified railway.

CONCLUSIONS

  In considering under what conditions the PPP contracts should be signed, we believe the structure of the PPP is so flawed that it is beyond reform. Moreover, even if the government were inclined to make changes at this late stage we have argued that the premature selection of preferred bidders has left them little leverage to do so. What we have found particularly disingenuous in the debate about the future of the network is the view that delaying the implementation of the PPP will hold up the funding the Underground so desperately needs. Whatever funding solutions are eventually adopted will require government grant. The money is already there and should be made available now. The government should not allow the political ping-pong over the PPP to prolong the suffering of passengers.


 
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