Memorandum by the Department for Transport,
Local Government and the Regions (LU 12)
1. This memorandum sets out the response
of the Department for Transport, Local Government and the Regions
to the Committee's request for information, pursuant to its inquiry
into London Underground.
2. The former Department of the Environment,
Transport and the Regions provided evidence for inquiries by the
then Transport sub-committee of the Environment, Transport and
Regional Affairs Committee between 1998 and 2000. This memorandum
provides a situation report on progress towards putting in place
a stable regime for investment in the Underground, and considers
the specific areas of interest to the Committee as described in
their 25 September call for evidence.
3. The Government announced plans for the
modernisation of London Underground on 20 March 1998. The proposals
were based on the Government's manifesto commitment to develop
a public private partnership. They were the result of a thorough
consideration of all of the options for modernising the Underground,
including the use of bonds, but having ruled out privatisation.
There followed extensive discussions with London Underground and
consideration of professional external advice. The modernisation
plans now form an integral part of the Government's plan for transport,
as set out in "Transport 2010-the 10 Year Plan", published
on 20 July 2000.
4. The Government believes that the modernisation
plans now being finalised are the best way forward for London
Underground. Under the proposed arrangements, London Underground
will run the Tube, and will manage three substantially identical
contracts with the private sector to maintain and modernise the
infrastructure. London Underground will remain in control and
will be responsible for safety, as it is now. The private sector
Infrastructure Companies will need to deliver the improvements
specified by London Underground.
5. The proposals utilise private sector
companies in construction and project management to deliver improved
infrastructure on the basis of stable, long term investment, allowing
London Underground to concentrate on what it does best: being
a transport operator. The investment these plans will unlock£13
billion over fifteen yearswill address the issue of fluctuating
and inadequate funding from which the Underground has suffered
over time. The benefits to passengers of this structure will be
6. The structure for modernising London
Underground in partnership with the private sector was extensively
debated in Parliament, during the passage of the Greater London
Authority Act 1999 ("GLA Act").
7. Implementation of the modernisation plans,
including the process for awarding three contracts for the maintenance
and upgrading of the Underground's infrastructure, is the responsibility
of London Transport and London Underground, not the Government.
The competition for the contracts is reaching its final stages,
and preferred bidders have been appointed for all three contracts.
The final commercial negotiations are well advanced. London Underground
expects the contracts to be finalised in the current financial
8. The Secretary of State has a number of
formal roles in relation to the implementation of the modernisation
plans. The key roles are provided for by the GLA Act, and the
London Regional Transport Act 1984 (the "LRT Act").
They are designation of contracts as a "PPP agreement"
(GLA Act), the appointment of a "PPP Arbiter" (GLA Act),
and the decision as to whether to give consent to the transfer
of the Infrastructure Companies to the private sector (LRT Act).
The Secretary of State also has an important role to play in committing
long term funding to Transport for London through the GLA Transport
Grant to support London Underground's financial requirements resulting
from the modernisation plans.
9. The Government's preference for a publicly
run, privately built solution to the long-term funding problems
of London Underground is based on a determination to deliver best
value for the Tube, its passengers and the taxpayer. For this
reason, contracts will only be awarded to the private sector if
bids show that they are likely to deliver better value than the
public sector alternatives.
10. London Underground is carrying out a
rigorous assessment of the proposed arrangements. London Underground,
and its parent, London Transport, will be responsible for assessing
the proposed arrangements and deciding whether to proceed. They
will take full account of value for money considerations when
making that assessment.
11. The Department understands that London
Transport has asked its external auditors KPMG to undertake an
audit of the financial evaluation. This is designed to provide
an independent opinion on whether the Public Sector Comparators
London Underground has employed represent a robust basis for evaluating
the value for money of the private sector bids.
12. The Secretary of State is responsible
for providing funding to London Underground through grant. The
Government will wish to satisfy itself that the Tube modernisation
plans are genuinely likely to represent value for money, and the
Department has asked the financial advisers Ernst & Young
to provide an independent opinion on the value for money offered
by each of the three proposed contracts before any is signed.
Ernst & Young will focus in particular on the overall robustness
of the value for money conclusions reached by London Underground
and its advisers.
13. The Tube modernisation plans will also
be open to the full scrutiny of the National Audit Office ("NAO").
Indeed, the NAO has already produced a report into the financial
analysis of the London Underground Public Private Partnerships.
This report made a number of recommendations about how London
Underground should carry out the final value for money evaluation,
in particular stressing the importance of considering wider factors
that cannot be readily quantified in financial terms. London Underground
will have full regard to these recommendations when it evaluates
the value for money of the final bids before signing contracts.
The Department has also asked Ernst & Young as part of its
review to consider the issues raised by the NAO, as well as the
points made by Transport for London and its advisers Deloitte
and Touche in their own assessments.
14. The Government and London Underground
have made clear that the contracts will be published in full once
the competition is complete, save for elements whose publication
could, in particular, prejudice the competitive position of the
public sector in future transactions, or breach the commercial
confidence of a third party. This is in line with the practice
set out in the Code of Practice on Access to Government Information
(2nd Ed, 1997). Publishing all the details of the contracts prior
to signature would run the risk of prejudicing negotiations with
the bidders and undermine London Underground's ability to obtain
best value for money.
15. London Underground has consulted the
Mayor of London and Transport for London as the competition has
proceeded, including on the development of the contracts, as is
required by the GLA Act.
16. The transfer of risk to the private
sector is a key element of the Government's plans for the Underground.
It is highly desirable that the private sector should bear those
risks which it is best placed to manage. It is also very desirable
that the private sector should retain responsibility for the condition
of the assets over a long period, so that they focus on whole-life
asset management. The contracts have been designed and negotiated
to achieve the optimum level of risk transfer; they are not based
on a dogmatic desire simply to shift risk to the private sector.
17. The concept of whole life asset management
is central to the modernisation plans. The Infrastructure Companies
will be responsible for the efficient maintenance and renewal
of the assets over a long period (thirty years) and will need
to make decisions that deliver high quality asset performance
in the long term. They will need to take account of systems integration
issues, to ensure the compatibility of all equipment.
18. The infrastucture companies will also
be subject to a performance regime, under which they are required
to maintain and improve the track, trains, signalling, civil infrastructure
and stations to enable London Underground to operate higher quality
and more reliable services with greater capacity. The companies
will be paid more for better performance and lose money if they
fail to deliver the improvements required. To make the returns
that they are projecting the infrastructure companies will have
to meet and exceed London Undergrounds's targets.
19. The Government has stated its intention,
in accordance with the provisions of the GLA Act, to transfer
London Underground Limited to Transport for London, once the competitions
have been completed. This transfer is expected to take place around
Spring 2002. Following transfer, London Underground in the public
sector as part of the Transport for London "family"
will continue to manage the contracts with the private sector
Infrastructure Companies and guarantee the obligations of London
Underground under those contracts. It will be for Transport for
London to consider what arrangements it wishes to put in place
to manage its relationship with London Underground, its subsidiary.
20. In this structure, London Underground
will be accountable to the people of London thought the Mayor
of London. In turn, the private sector Infrastructure Companies
will be responsible to London Underground through the tight contractual
framework currently being negotiated.
21. The Tube is a vital national asset,
and receives income from the taxpayer. The Government is keen
to secure its future, by putting in place a regime for stable
investment, before effecting the transfer of London Underground
to Transport for London. In determining the level of grant to
be provided for the first seven years the Government will agree
longer term targets for the performance of the Underground with
the Mayor of London and Transport for London. These will aim to
cut journey times by increasing capacity and reducing delays,
delivering year on year improvements in reliability and passenger
22. Transport for London is a Best Value
Authority, within the meaning of the Local Government Act 1999.
London Underground, as a subsidiary of Transport for London, will
be subject to the best value regime set out in that Act, which
requires, among other things, such an authority's functions to
be reviewed, and that there be regular reports on performance.
London Underground will thus be accountable to Londoners through
the requirements that regime places on Transport for London. It
would be for Transport for London to consider and put in place
any additional performance regime for London Underground.
23. The modernisation plans currently being
negotiated by London Underground provide for an increase in capacity
on the existing network, of some 15 per cent over the life of
the modernisation project. The plans will also provide flexibility
for the Mayor to increase the improvements to be delivered by
the private sector Infrastructure Companies. In addition to provisions
allowing for safety improvements and minor works, the modernisation
plans allow for additional major enhancements to the network,
such as station rebuilding projects or line extensions. Decisions
on whether such extensions should go ahead will lie with the Mayor
of London and Transport for London, as the new owners of London
Underground in accordance with the provisions of the GLA Act and
the Mayor's Transport Strategy.
24. As the Committee may be aware, on 20
March 1998 the Government wrote to all London Transport and London
Underground staff about the Government's plans for London Underground,
making clear that staff would:
Have the right to remain in the London Transport
pension fund, as contributing members;
Continue to benefit from concessionary travel
Continue to enjoy the rights under their then
existing employment contracts, covering pay, hours, leave, collective
agreements and union representation.
25. Pay, terms and conditions of employment,
pension rights, concessionary travel, and existing collective
agreements for all Infrastructure Company staff, will be protected
under a contractually binding "Code of Practice" between
London Underground and the Infrastructure Companies, offering
equivalent protection to TUPE.
26. Pensions of LT Staff who become employees
of the Infrastructure Companies are further protected by virtue
of provisions in the GLA Act and the LT Pensions Arrangements
27. London Underground has an excellent
safety record. Safety on London Underground is the first and overriding
priority. The Health and Safety Executive (HSE) accepted in March
2000 London Underground's safety case in its current structure,
with one operating company and three separate Infrastructure Companies,
established as subsidiaries of London Underground. Before the
modernisation plans can go ahead, the HSE will have a further
double lock on safety. First, the HSE is currently examining London
Underground's safety arrangements under tough new regulations,
the Railways (Safety Case) Regulations 2000. It will then consider
the safety arrangements again reflecting the involvement of private
sector Infrastructure Companies. The Government has made a clear
commitment that if these safety tests are not passed the plans
will not go ahead.
15 October 2001