Further to our meeting of 13 September and subsequent
discussions on 18 September, we have considered your requirements
and have set out how we believe that Ernst & Young could assist
you in relation to the above project. We set out below the scope
of the assignment, a project approach, an assignment team and
a fee basis.
We understand that the Department of Transport,
Local Government and the Regions ("DTLR") in its role
as sponsoring department for London Underground Limited ("LUL"),
wishes to obtain further advice on the value for money offered
by the three proposed Public Private Partnership ("PPP")
contracts for LUL. This advice will assist Ministers in the final
assessment of the proposals.
DTLR has requested that Ernst & Young carry
out an independent review (the "Review") of the value
for money assessment prepared by LUL and its advisers, PricewaterhouseCoopers
The review would focus on the overall robustness
of the value for money conclusions reached by LUL and its advisers.
This would entail reviewing:
the methodology adopted for assessing
the value for money of the contracts;
the assessment of the risks retained
by LUL in the PPP contracts;
the assessment of the value of risks
transferred to the private sector under the proposed contracts;
the consideration of both financial
and non-financial factors in the overall value for money assessment;
the basis of preparation of the Public
Sector Comparators ("PSC") and their use in the comparison
against bids; and
the overall robustness of the conclusions
reached by LUL and its advisers.
The Review would be based on the assessments
already made by LUL and PwC. In addition, we would also review
the related assessments produced by other parties including Transport
for London ("TfL") and its advisers Deloitte
and Touche ("D&T"), the National Audit Office ("NAO"),
KPMG, the Industrial Society and the Institute for Public Policy
Research. Where it were considered appropriate, we would seek
to discuss further with these bodies any specific points raised.
The Review would consist of the following main
(a) initial data and documentation gathering
(i) the most recent value for money assessment
prepared by LUL;
(ii) key source data including most recent
bid proposals from the preferred bidders, PSC and risk registers;
(iii) other third party value for money
reviews referred to above;
(b) detailed review of the methodology adopted
and the application of that methodology;
(c) an interview programme with key personnel
involved in the value for money assessment. This is likely to
include, but not be limited to, representatives from LUL, PwC,
DTLR, HM Treasury, TfL, D&T and the NAO;
(d) a formulation of initial conclusions
that would then be discussed with representatives of LUL and its
advisers, DTLR and NAO. We will also endeavour to inform and discuss
with these bodies our conclusions as they emerge; and
(e) the presentation of the final Review
conclusions to DTLR and completion of a report thereon.
Our approach assumes that the risk registers
contain the contractual position in relation to risk transfer,
including any caps and floors. We also understand that the final
assessment will be completed under both current and proposed Treasury
Investment Appraisal guidance. We will not comment on any affordability
issues in relation to the assessment.
In order to complete the above work satisfactorily,
Ernst & Young would require full and open access to all necessary
information and personnel. The inability to obtain such access
may undermine the ability to develop fully the Review conclusions.
The Review will look at the three proposed PPP
contracts separately and in total. We will give an opinion on
the overall robustness of the conclusions reached in the LUL and
PwC assessments. We will also comment on any areas where our conclusions
vary from theirs as well as those where we are in agreement. In
performing the Review we may seek to rely on work performed by
KPMG in respect of the Public Sector Comparator.
We further believe that it is critical to the
success of the Review that the methodology to be adopted is agreed
with the NAO prior to its commencement. In particular it is necessary
to ensure that both an agreed definition of value for money is
being employed and that the principles adopted to test this are
In approaching the work we will plan the activities
based on the information available and likely dates of final information
At the commencement of the assignment we will
ascertain the status of the relevant information for LUL and PwC
and in which particular areas this is likely to change. We will
focus our initial efforts on the aspects considered most stable
and subsequently address the changes to this initial point.
In order to ensure effective control of the
movements in the information, we will require a change control
process to be adopted by the information owners.
We understand that the final value for money
assessment will not be available until 12 December, on the basis
of commercial negotiations being completed on 30 November. The
limited amount of time available to conclude our report at this
stage may reduce the ability to make and provide complete conclusions.
The ability to assess key areas in advance of this date will assist
During the assignment we will provide regular
feedback to you on the progress and emerging findings. Initially
this will take the form of fortnightly meetings.
Use of External Organisations
You will be aware that the recent report for
the Treasury Taskforce by Arthur Andersen was prepared in conjunction
with a leading academic institution. In the light of recent media
coverage of the PPP proposals, the use of the London Business
School or similar as part of the Review team may provide additional
authority to the report in the wider public domain. If DTLR wishes
to consider this further we would be happy to discuss it.
You have asked that we consider the use of an
external technical advisor as part of the review to assist in
certain areas of the work. We are able to consider this provided
a suitable organisation can be identified and agrees to participate
on appropriate terms.
We would anticipate that the Review would take
between six and eight weeks to complete, with up to a further
two weeks to finalise the required report. The ability to deliver
within these timescales will depend upon the speed with which
information is made available and access to the necessary individuals
on a timely basis. On this basis we assume the assignment would
be completed by 17 December. We would be happy to discuss this
with you further in order to ensure that this is consistent with
your own requirements.
The conclusions of the Review will be presented
in a report to DTLR. We anticipate that you may wish to make this
report publicly available. This will need to be reflected in the
contractual arrangements between us.
The status of the report in relation to any
information considered to be commercially sensitive will also
need to be agreed.
Due to the subjective nature of the value for
money assessment, it is not always possible to conclude decisively
on the position of proposed contractual arrangements. The conclusions
of the Review are likely to be based on an assessment of a range
of factors and hence the overall assessment may be subjective
and based on stated assumptions.
Ernst & Young
4 October 2001