73. It is four years since the Government announced
its intention to develop the PPP deal to modernise the Underground.
Its development has taken an excessively long time and has distracted
London Underground Limited from the business of running a quality
Underground service. Continued under-funding and uncertainty in
funding provision over this period has prevented London Underground
Limited from reducing the maintenance backlog. A viable long-term
solution for funding London Underground must be put in place immediately.
74. The PPP for the Underground is the most complex
infrastructure PPP ever developed. The 'codification' of London
Underground's operations has led to the development of a series
of very complicated contracts. The funding structure is experimental.
Given the strategic importance of London Underground, the decision
to adopt such a structure constitutes a significant risk. We are
not convinced that 'shadow running' provides a basis to understand
how well the system will work under PPP. We conclude that it
is inevitable that the PPP will lead to significant and expensive
disputes over the contracts and between staff and employers.
75. The expected revenue stream from fares to pay
for infrastructure improvements is significantly lower than when
the PPP was proposed. The affordability of the various elements
of the PPP deal has only been considered well after the financing
mechanism for the deal was selected, contrary to the advice of
the National Audit Office. Public subsidy constraints have pushed
back the proposed capacity increase of 15 per cent for the network
from Year 20 to Year 30 of the contract. The capacity improvements
offered by the PPP will not even meet the demand forecast for
the existing Underground network. That capacity constraint will
have knock on-effects to London's competitiveness, other transport
networks and land-use patterns, as well as the future revenue
stream from the Underground. The failure of the proposed
deal to provide adequate funds will not only affect the travelling
public but will also lead to an erosion of value for money. The
Government must provide the funds to meet the target of a 15 per
cent increase in capacity by Year 20 of the 30-year programme.
The potentially vast cost to London and the nation's economy of
failing to meet that target justifies a considerable increase
in Government subsidy.
76. The allocation of risk between parties is critical
to the success of the PPP. As the Secretary of State acknowledged
"There will be some people who would like the Government
to take on the risk because they have a financial interest in
getting us into that position."
The risk profile for the Underground is enormously complex and
it is difficult to be confident that all of the risks can be identified
and quantified. It is clear that the Government has retained significant
amounts of risk and will ultimately retain the responsibility
for ensuring the continued running of the Underground. Our
considerations above show that the shortage of funds has already
constrained capacity improvements and it is likely, therefore,
that risk transfer has also been limited. If little risk can be
transferred to the private sector then the rationale for the PPP
is seriously undermined.
77. A number of key factors in the assessment
of value for money are subjective and difficult or impossible
to quantify. There are clear differences in opinion between experts
in the engineering, management and finance fields involved in
the process about these factors. There is also considerable risk
that the cost of the project will be inflated after the first
review period where prices are not fixed. This risk has been amplified
by decisions to delay significant amounts of capital spending
to these later periods when they will be more 'affordable'. We
note that the Secretary of State accepted that it will not be
possible to provide a definitive answer regarding the value for
money of the bids and we therefore recommend that the Government
does not approve the PPP deal.
78. In December 2000 the National Audit Office asked
London Underground Limited to consider the possibility of one
or more bids failing the value for money test. Those options are
only now being considered by the Government, a year later. Other
options should have been developed earlier. Transport for
London have proposed an alternative management plan; we have not
been able to evaluate that plan in detail over the course of the
inquiry. We recommend that the Government should develop alternatives
to the PPP in conjunction with the Mayor and Transport for
79. It is imperative that a decision not to proceed
with the PPP should not delay investment in the long-term needs
of the Underground. We believe that experience gained from the
PPP bid development and the expertise within London Underground
Limited will enable such decisions to be taken whilst a new management
plan is put in place. Investment decisions to upgrade the network
should be undertaken in parallel with the handover of the Underground
to the Mayor.
80. It is clear that past failings of London Underground
Limited have been the result of funding uncertainty and a shortage
of funds. Long-term secure funding is essential to modernise
the Underground to produce a system capable of sustaining London's
role as a world city. In recommending that the PPP deals are rejected,
we are certain that any alternative management system must be
guaranteed the necessary levels of funding over a long period,
as is the case for other areas of transport through the 10 Year
Plan. We note that London Underground Limited's chief reason for
supporting the PPP is that it provides certain long-term funding.
We recommend that, whatever scheme is chosen, the Government
provides the same type of long-term funding commitment to the
Underground as was envisaged under the PPP.
81. The surplus from the fare box is envisaged to
contribute a significant proportion of the investment and maintenance
requirements for the Underground under all of the options considered.
That revenue has been declining since 1998 and there is now a
deficit, principally due to rising operational costs. The Mayor
stands to be responsible for any shortfall in the funding from
this source. Such a shortfall could have serious consequences
for other areas of London's transport budget. It is essential
that the Government and the Mayor of London revise their estimates
of the contribution of fares to the investment programme. The
Government must commit to funding any resultant financial shortfall
and by doing so ensure that it neither compromises the investment
plan nor creates pressure for above inflationary fare increases.
82. The Committee notes the constructive relationship
between Transport for London, the Government and the Strategic
Rail Authority in planning and contracting a number of extensions
and new rail projects outside of the PPP. Those new lines are
an important part of London's Integrated Transport Strategy and
are necessary to relieve pressure on the Underground network.
We welcome the Strategic Rail Authority's decision to fund
completion of the East London Line extension by 2006. We recommend
that the Government continues to support Cross Rail and the Hackney-SouthWest
Line as part of the Mayor's transport strategy.
83. If the Government decides to proceed with PPP
it should take into account the following points:
- The timescale for auditing the operational implementation
of Version 3.0 of the Safety Case and approving Version 3.1, barely
one month, is too short to identify the full range of operational
difficulties that might be encountered in practice. It is not
clear that the interaction between the commercial elements of
the PPP contracts and the implementation and profile of safety
on the Underground has yet been given enough consideration. We
therefore recommend that the Health and Safety Executive give
themselves more time to establish whether Version 3.0 of the Safety
Case produces safe working practices, to allow operational difficulties
to be more clearly identified, before considering approval of
Version 3.1. We find it disgraceful that the Health and Safety
Executive has only been given one month to reach such important
- Monitoring the safe performance of the Infracos
is the responsibility of London Underground Limited. The costs
of the monitoring process will be significant and it is not clear
that London Underground Limited have enough staff to meet the
increased work load that they will face. We recommend that
the Government fund the increased monitoring costs to ensure that
the public sector has sufficient control over safety and performance
monitoring of the Infraco operations.
- We are concerned that the register of assets
against which the future costs of the improvements to the Underground
have been estimated is insufficiently developed and incomplete.
Despite improvements in the maintenance of an asset register we
consider that London Underground Limited will be subject to cost
inflations after the first review period if conditions are worse
than currently understood. The existence of 'grey assets'
about which little is known is unacceptable. The establishment
and maintenance of a complete register of all assets is a priority
for the Underground network and should have preceded the PPP contract
- We remain unconvinced that the arbiter will have
sufficient powers to prevent the incumbent infrastructure companies
pressing for more favourable terms at the seven and a half year
reviews. We recommend that the arbiter's office be established
early in the PPP contract and well resourced to ensure that the
dispute resolution mechanism is genuinely independent of the parties
- We are concerned that the division of the network
will lead to different operational practice, and training, which
may make future unified control of the network more difficult.
We recommend that London Underground and the Infracos enter into
an agreement to develop combined training programmes to minimise
the potential divergence of working practices and standards.
- Managing, monitoring and implementing the PPP
will require a significant increase in the number of skilled staff
available in both the public and private sector companies. We
are concerned that there is a shortage of such skills for both
the Underground and mainline networks and that the uncertainty
in both areas is leading to a flow of skills out of the sector.
We recommend that London Underground and the Infracos work
closely with the trade unions and professional institutions and
the Strategic Rail Authority to develop a National Rail Academy.
- The improvements in the Underground will take
a number of years to come on stream and during this time there
will be considerable disruption. The upgrading of the Underground
will require close co-ordination and co-operation between the
maintenance and operational elements of the Underground network
and the bus network. We recommend that Transport for
London be given lead responsibility for the co-ordination of major
upgrades on the Underground to reduce disruption to the travelling
84. Insufficient attention has been given to the
development of a hybrid structure of mixed private and public
sector Infraco management should one or two of the bids fail the
value for money test. A mixture of public and private sector Infracos
will add further complexity to the management of the network.
By definition, those Infracos that fail a value for money test
will be the highest risk concessions. Those are the ones that
the public sector will take on. Retaining one Infraco in the public
sector may not enable the full range of benefits of unified public
sector control to be delivered and therefore prove an unsatisfactory
half-way house solution. We recommend that the Government should
not pursue a mixture of public and private Infraco operations
if one of the bids fails. The benefits of retaining all of the
three Infrastructure companies in the public sector as a single
integrated operation must be re-examined.
85. The Committee has identified several features
of the development of the PPP deal which should be addressed in
future public private financing assessments.
- The initial forecasts that the PPP would provide
a saving of £4.5 billion over public sector management were
inadequate and flawed. A more thorough
analysis of the alternative options should have been undertaken
at an earlier stage. The linkage between the financing of the
scheme, the requirements of the Underground network and public
sector affordability have been ambiguous. The Committee is concerned
that in developing the PPP deal the Government decided first how
the Underground should be financed and then addressed what could
be afforded. The miscalculation of the contribution of fare box
surplus to the investment programme has particularly served to
highlight these shortcomings. The Government should follow
the National Audit Office's advice to address the affordability
and funding provision for infrastructure projects before deciding
on the financing mechanism.
- The bidding process has been hugely disruptive
to operations and staff morale. We are
concerned that matters such as the upgrade of engineering standards
(costing between £5 million and £10 million) were delayed
due to financial restrictions when £100 million has been
spent on consultants' fees to develop the PPP deal.
- The PPP has provoked widespread public debate.
The Committee deprecates the level of information provided about
the nature of the PPP contracts throughout the process. We welcome
the Secretary of State's decision to provide the public with some
of the details that will inform this important decision. Greater
effort must be made to divulge those elements of such contracts
that do not directly affect the Government's negotiating position
to the public at an earlier stage.
86. A principal cause of the atrocious state of
the London Underground has been the failure of the Treasury to
provide adequate long-term funding over a number of decades. The
Treasury is also, according to the evidence we received, one of
the principal instigators of the PPP scheme. We were therefore
appalled that despite its leading role it refused to make itself
accountable to Parliament by giving evidence to the Sub-Committee
during the inquiry. That refusal threatens to undermine the Departmental
Select Committee system. Those Ministers who make decisions must
be accountable to Parliament for them.
172 HC (2001-02) 373-IV, Q758. Back