Memorandum by London Underground Limited
LONDON UNDERGROUND AND THE PUBLIC PRIVATE
This Memorandum is London Underground's formal
response to the inquiry into London Underground and the Public
Private Partnership currently being carried out by the Transport
This document provides an update on evidence
presented to the former Transport sub-committee of the Environment,
Transport and Regional Affairs Committee between 1998 and 2000
and it provides a specific response to the questions posed by
the Sub-Committee in its Press notice of 25 September 2001.
Government policy on the future funding
of London Underground was set out in the Labour Party manifesto
of 1997 and took shape in plans announced by DETR during March
The PPP involves creating three infrastructure
companies "Infracos" to maintain, upgrade and replace
track, signalling, trains, stations and other engineering assets.
Train and station operations, signalling control and safety management,
remain with LUL in the public sector.
Following a market consultation exercise,
LUL began the formal competition for the PPP contracts, which
involved identifying potential bidders; shortlisting and selecting
preferred bidders for the three Infraco contracts.
Preferred bidders for two of the
three Infracosthose covering the Bakerloo, Central and
Victoria Lines (Infraco BCV) and Jubilee, Northern and Piccadilly
Lines (Infraco JNP) were selected by the Board of London Regional
Transport on 2 May 2001.
This Board then selected a preferred
bidder for the Sub Surface Lines (District, Circle, Hammersmith
and City and Metropolitan Lines) on 19 September 2001.
Commercial discussions with the preferred
bidders are currently progressing to finalise the PPP contracts.
We expect to be in a position to sign the contracts in the current
The PPP will not proceed unless and
until two critical outstanding tests are met concerning safety
and value for money. These tests are detailed later in this memorandum.
1. Under what conditions should the government
sign PPP contracts?
1.1 Comment on the desirability of an independent
audit prior to signing to ensure value for money.
HM Government will not sign the PPP contracts.
The contracts will be between London Underground Limited and the
private sector bidders.
The Government has consistently made clear its
position that PPP would not proceed unless it was shown to be
value for moneya position endorsed by LRT/LUL. The process
for assessing value for money is as follows:
(a) LUL/PricewaterhouseCoopers and Ove Arup
will recalculate the "Public Sector Comparator" (an
estimate of what it would cost for the public sector to deliver
the outputs to be achieved by the PPP) on the basis of final draft
contract documents. This will be presented as a range of possible
values, reflecting different assumptions and judgements about
how the public sector might perform.
(b) KPMG (LUL's auditors) will audit the
(c) The final prices received from bidders
will be compared against the PSC.
(d) This financial comparison will be supplemented
by an analysis of wider factors as recommended by the National
Audit Office, including factors "which are either difficult
or impossible to quantify in financial terms, and which could
impact directly on the value of the different options" according
to the NAO. These will include strategic issues such as the potential
benefits of access to private sector efficiencies and skills in
asset management, and the impact of the different incentives and
constraints acting on private and public sector management.
(i) The Mayor, Ken Livingstone, and Transport
for London will have the opportunity to review and comment on
the analysis in consultation with LUL.
(ii) The government will consider a comprehensive
review of all the above to be undertaken by Ernst and Young.
The NAO will have the opportunity to report
on this process, although the timing and basis of their report
is obviously a matter for them. LUL will fully co-operate with
the NAO in any analysis they wish to undertake during the process
of finalising the value for money analysis.
1.2 How much information about the precise
nature of the contracts should be made public before they are
London Underground has a statutory duty to consult
the Mayor and TfL on the implementation of the PPP, and
has provided full access to all the contract documents as part
of that process. LUL consider that these arrangements provide
an appropriate balance between the desirability for there to be
an independent scrutiny of the detail of the contracts and the
need to avoid conducting commercial negotiations in public. It
has always been LUL's positions that the main details of the contracts
would be made public following contract award.
1.3 What is the allocation of risk between
the public and private sectors?
LUL believes that key drivers of performance
and value for money are clear transfers of risk to the private
sector in the areas of whole life asset management and engineering
The optimum risk transfer as a whole is determined
by value for money considerations. The value for money analysis,
and the detailed contract scrutiny provided by the consultation
arrangements therefore provide ample opportunity to review the
risk allocation position.
1.4 What opportunities exist to adjust the
contracts after they have been signed; and the role of arbitration
in the event of dispute over the contracts?
The contracts provide many mechanisms to allow
changing circumstances to be allowed for at both day-to-day and
strategic levels: for example, Minor Works, Intermediate Works,
LUL Specified Rights, Major Enhancements, Periodic Review, Safety
Changes and changes to standards. LUL considers that it would
not be appropriate to extend the scope of Extraordinary Review.
These have already been the subject of extensive
exchanges with TfL both as a part of the consultation process,
and in discussion, and there will be a further opportunity for
comment in a final round of consultation before the contract terms
2. How implementation maximises benefits
and minimises disadvantages
2.1 Comment on TfL regulation and
The PPP is regulated using both legal powers,
and rights under the PPP contracts. In each case, the regulation
is exercised technically by LUL. The most significant area of
statutory regulation is, of course, safety, where LUL is the Infrastructure
Controller, with overall responsibility for safety over the network
as a whole. It is a criminal offence for anyone doing work on
the railway not to co-operate with LUL as Infrastructure Controller,
and enforcement action can be taken by the HSE. These legal obligations
are backed up by contractual requirements for infracos to have
safety cases (which they are not currently required to have by
At an operational level regulation comes through
LUL's rights to run the railway in a way which responds to day-to-day
needs, its rights to manage incidents, and its rights to "step-in"
and take over the running of infracos activities.
If infracos are not performing adequately, LUL
has a variety of measures it can take, including the imposition
of stringent financial penalties and other steps.
2.2 Setting and monitoring performance targets
London Underground's research has consistently
shown that, after safety which is always the first consideration,
what is most important to customers is to have short and reliable
journey times. Next most important is the general ambience of
their travelling environment. Accordingly, the PPP performance
objectives focus on these areas, which are also the key objectives
for LUL itself.
2.3 Comment on the current status of Underground
and Union relations
It is in everyone's interestLUL, infracos,
TfL, Londonto have good industrial relations. In
relation to PPP, the Government has given clear assurances which
ensure the protection of the position of staff transferring from
public to private sector.
There is a long history of poor industrial relation
on the Underground. The new team of LUL Directors appointed from
September 1999 has analysed the causes of this situation in some
depth and is now addressing them. The recent calling off of threatened
strikes marks the start of what is hoped will be a successful
reform of the relationships between the Company and its trades
2.4 Comments on passenger and staff safety
The standards of safety and the requirements
for continuous improvements are rooted in statute, and apply equally
in the PPP world as now.
The Underground has an in-depth understanding
of all its major accident and incident risks, and the associated
risk control systems, which ensure that these risks are reduced
to as low as reasonably practicable-as required by Health and
As a result, LUL has developed a good safety
track recordbetter than any comparable metro system around
the world. The last major collision occurred more than 27 years
The rigorous management arrangements which have
achieved this record are mandated in the PPP contractswhich
also require that they continue to be improved as required by
the Health and Safety at Work Act 1974, and reinforced by all
the specific regulations made under the Act which are relevant
In designing the PPP architecture close attention
has been given to ensuring that the contractual and safety regimes
work together to improve the safety performance into the future.
The aim is further improving the safety leadership and supporting
management arrangements of the organisation.
In addition to LUL's own internal safety management
processes, the Safety Case for the PPP arrangements is also currently
subject to rigorous assessment by the Health and Safety Executive
(HSE) as required by the Railways (Safety Case) Regulations 2000.
HSE must accept the Safety Case, in accordance with these Regulations,
before the PPP can proceed.