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

Annex 1



  1.  The PPP is a 30-year contract, largely because of the weight LUL attaches to ensuring Infracos manage the assets on a whole-life basis.

  2.  A contract which was fixed for 30 years would not be practicable. LUL needs flexibility to be able to change what the PPP delivers as circumstances change. Nor could bidder offer fixed prices for 30 years in a way, which would offer value for money. It follows that there must be a way of re-setting both requirements and pricing within the 30-year contract period at an appropriate interval. This is the purpose of the periodic review.

  3.  There must be a way of determining what the price should be if the parties cannot agree at a periodic review. This is the function of the Arbiter.


  4.  The Arbiter is appointed by the Secretary of State under the GLA Act. Section 229 says that the PPP contract may provide for matters of any description to be referred to the Arbiter, and any party to the PPP contract may seek a direction in relation to any such matter. The Artiber's direction (which may include a direction to amend the contract terms) on any matter referred to him is final and binding, unless the parties otherwise agree. The parties, acting jointly or individually, may also ask the Arbiter to give guidance on any matter relating to the PPP contract.


  5.  Section 231(1) of the Act requires the Arbiter to act in a way he considers best calculated to achieve the following objectives:

    (a)  to ensure LUL has an opportunity to review and amend its requirements under the PPP if in the opinion of the Arbiter LUL will be unable to afford the changes it is proposing at a review;

    (b)  to promote efficiency and economy in the provision of the construction renewal, improvement or maintenance of the infrastructure;

    (c)  to ensure that any rate of return in the PPP Contract would, in the Arbiter's opinion (taking into account such matters as the PPP contract may specify and leaving out of account such other matters as it may specify), be earned by the Infraco which is efficient and economic in its performance of the PPP Contract; and

    (d)  to enable Infraco to plan the future performance of the Contract with reasonable certainty.

  6.  Section 231(6) further requires the Arbiter, in giving a direction or guidance to take account of:

    (a)  any factors which are notified to him by the parties to the Contract, acting jointly, as factors to which he must have regard; or

    (b)  any factors set out in the PPP contract as factors to which must have regard.

  7.  Section 232 gives the Arbiter powers to carry out inspections, to consult any person or body, and do all such things he considers appropriate, necessary or expedient to enable him to give directions or guidance. Section 233 enables him to request information from any party to the PPP contract (and any parties' associates and any "PPP related third party") as he considers relevant. If a party fails to comply with a request the PPP Arbiter may serve a notice on that person requiring him to produce documents or information. Section 234 makes it a criminal offence for a person to intentionally alter, suppress or destroy any document which he has been required to produce under a notice.


  8.  Under the PPP contract, the Arbiter is required to set a price which:

    (a)  allows for the amounts which the parties agree in advance are necessary to service existing debt and equity;

    (b)  allows an efficient and economic Infraco to cover its future costs;

    (c)  allows for prudent additional "project specific" contingencies;

    (d)  allows for the service of "economic and efficient" new debt and equity;

    (e)  allows for additional contingencies to reflect any change in the overall risk profile of the Infraco arising from the restated terms; and

    (f)  enables the Infraco to earn its agreed rate of return, adjusted to reflect changes in the risk free rate, the market's perception of the risk in the deal, and the Arbiter's view of any change to the risk profile of the deal as a result of restated terms.


  Infracos are expected to be "economic and efficient" by the standards of the industry, and to follow "good industry practice". The PPP contract provides guidance to the Arbiter about the interpretation of these phrases. For example, the Arbiter is given guidance as to appropriate industry benchmarks against which to compare the Infraco's performance.


  9.  In order to protect the public interest, the Arbiter must have a clear remit, appropriate powers, access to all necessary information, and a clear basis on which to make a judgement. These objectives are achieved by a combination of statutory and contractual provisions, as described above.

London Underground

November 2001

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