Select Committee on Transport, Local Government and the Regions Appendices to the Minutes of Evidence

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.


  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.

Derek Smith


30 November 2001

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