Supplementary Memorandum by London Underground
Limited (LU 11A)
I am now able to provide an update on our evidence
on the Public Private Partnerships (PPP) as requested by Members
at the Transport Sub-Committee on 21 November.
The clauses referred to by Mr Kiley are part
of the process of Periodic Review which takes place every 7½
years. The purpose pf Periodic Review is to allow LUL to vary
the terms of the PPP so that it continues to meet the needs of
customers as those needs change over time. As currently drafted,
the contract allows LUL to make changes which are almost unlimited
in scope, and Infracos are obliged to accept these changes, and
provide finance for them, at whatever price the Arbiter determines.
Bidders and their lenders argue that the potential scale of the
changes is such that the Infraco would be unfinanceable. This
is not LUL's intention.
The Periodic Review arrangements need to ensure
that the LUL can obtain the flexibility it needs, without imposing
impossibly burdensome new obligations on the Infraco. If the scale
of the changes is such as to require new Infracos to raise new
finance, the contract must provide a way of allowing for the impact
of this on Infraco's existing finance and its future financing
costs. Finance market testing is one way of achieving this. There
are other possible ways, which are still under discussion with
bidders. Where LUL does not require Infraco to raise new finance,
such provisions would not apply, provided LUL's proposed contract
changes were otherwise reasonable.
THE PPP ARBITER
A separate note on the PPP Arbiter is outlined
on Annex 1.
London Underground agrees that it is in the
interests of all parties to ensure that there are clear provisions
governing he handback of the Infracos to the public sector, should
that ever become necessary. This would arise if Infracos were
significantly underperforming, and the contract already sets rules
for how this would be handled.
The other situations in which this could happen
are if the Infraco became insolvent, or if the Infraco became
unfinanceable because of changes imposed by LUL at a periodic
review. The precise arrangements, which would apply in these circumstances,
are still being finalised with bidders and their lenders.
A right of public interest termination goes
further than this. It gives the public sector the ability to terminate
the contracts even where Infracos are performing their contractural
obligations to a satisfactory standard. Bidders do not accept
that London Underground should be able to terminate unilaterally
in these circumstances. If the public sector considers that different
performance standards should apply, it has the opportunity to
change them at a periodic review
The PPP does not require the private sector
to take on risk on LUL revenues. Although revenue depends somewhat
on the overall quality of service, it depends much more on general
economic factors, such as the level of employment and real incomes
in London. Any incentive effect on the Infracos by requiring them
to take revenue risk would therefore be swamped by these economic
factors. Infracos would either earn windfall returns (if revenues
rose because the economy improved) or would risk suffering losses
unconnected with their performance, which would force them to
include large contingencies in their bid prices. Both would compromise
value for money.
PPP Infracos must comply with general health
and safety law in the same way as any other business. They must
also comply with their own safety cases, and London Underground's
existing safety standards and procedures. These are risks transferred
to the private sector. Infracos' future investment plans must
therefore ensure that safety risk remains ALARP. This includes
providing for safety improvements flowing from their normal maintenance
and investment programmes. If it becomes apparent that additional
expenditure is required (eg new risk assessments indicate that
new measures are required to promote safety), the Infracos have
to carry out these additional works, drawing on private finance.
At the end of the year in which the money is spent, LUL repays
this finance. The risk that previously unforeseen safety expenditure
is required is therefore taken ultimately by the public sector,
although the expenditure is financied initially by the private
sector. Infracos must comply with ordinary legislation as it applies
to businesses generally. The risk of any future changes is generally
with the private sector. An exception is made for new legislation,
which is targeted specifically at PPP or PFI contracts. In such
a case, Infracos would be entitled to be compensated for the impact
of the legislation on them.
Infracos have a range of general obligations
relating to the environment, including complying with good industry
practice in environmental management, and having an environmental
management system complying with the ISO 14001 Standard, as well
as complying with general environmental law. Infracos are required
to mitigate and respond to environmental harm (eg contamination),
although the public sector retains certain risks in relation to
pre-existing environmental hazards.
I hope that this supplementary information is
helpful. Please do not hesitate to contact me if you have any
queries on the information or any other aspects of out operation.
30 November 2001