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



  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 ("PwC").

  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 elements:

    (a)  initial data and documentation gathering exercise, including:

      (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; and

      (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 robust.

  In approaching the work we will plan the activities based on the information available and likely dates of final information becoming available.

  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 this process.

  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 Report

  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

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