House of Commons - Transport, Local Government and the Regions

Select Committee on Transport, Local Government and the Regions Seventh Report

SEVENTH REPORT

The Transport, Local Government and the Regions Committee has agreed to the following Report:

LONDON UNDERGROUND - THE PUBLIC PRIVATE PARTNERSHIP: FOLLOW UP

INTRODUCTION

1. The Transport, Local Government and the Regions Committee and its predecessor Committee have tracked the progress of the proposed Public-Private Partnership (PPP) for London Underground with great concern over the four years since its inception. The Committee's most recent report London Underground[1] was published on Tuesday 5 February. The report highlighted a number of major concerns about the PPP, the assessment methodology, the viability of such complex contract control mechanisms and whether indeed the PPP meets the needs of the travelling public. The report concluded that it was not possible to establish that the PPP offered value for money and that an alternative way forward should be sought.

APPROVED BY LONDON TRANSPORT

2. Two days later, the Board of London Transport met to decide whether or not to approve the PPP bids. The Board decided that it was minded to proceed with the PPP based on the evidence presented in the Final Assessment Report produced by London Underground.[2]

APPROVED BY THE SECRETARY OF STATE

3. The Secretary of State announced in a written answer on the same day that he agreed that the Public Private Partnership for London Underground should proceed.[3] The Secretary of State said that his decision to approve the PPP had been based on the Board of London Transport's analysis of the Final Assessment Report and the outcome of the independent review of London Underground's assessment process conducted for him by Ernst & Young.[4] The Secretary of State told Parliament that:

"The benefits of proceeding with the tube modernisation contracts are considerable. Over the first 15 years of the contract, London Underground will save £2 billion compared to traditional public funding. On any measure, that represents a significant saving to the public sector. What is more, the contracts will mean faster and more reliable tube journeys than the alternatives. London Underground says that those could be worth as much as a further £2 billion to its passengers."[5]

The Secretary of State also said that if the decision to proceed with the PPP was not taken:

"We could look forward to yet more delay while different plans are prepared and a new procurement exercise is put in place. That would condemn Londoners to several more years of the status quo, with a creaking infrastructure that is unable to deliver the efficient and modern underground system that the travelling public rightly deserve."[6]

THE INQUIRY

4. The Transport Sub-Committee held a further evidence session on 27 February with the partners from Ernst & Young responsible for the independent review; Martin Blaiklock an expert consultant on infrastructure private finance schemes; the Board of London Transport; London Underground Limited; and Transport for London to determine the criteria on which the decision to proceed with the PPP was being taken. We also took evidence from the Secretary of State regarding London Underground on 6 March. The detail of the reports and their subsequent interpretation by the Secretary of State and the Board of London Transport have raised more questions than answers.

5. We understand that a final decision on the PPP will be taken at the close of consultation with the Mayor and Transport for London towards the end of March. This report outlines the Committee's immediate main concerns in the light of the reports of London Underground and Ernst & Young and the statements of the Secretary of State. The full transcripts from the evidence sessions will be published in due course. We are most grateful to those who gave evidence to us or otherwise assisted us during our inquiry. In particular, the Committee is grateful for the advice and guidance provided by our specialist adviser Kingsley Manning.

Key Issues

ERNST AND YOUNG REVIEW

6. The Ernst & Young review was intended to provide an independent review of the overall robustness of the value for money assessment prepared by London Underground Limited.[7] Ernst and Young note that the value for money assessment is "part art and part science and involves a blend of subjective judgements and fact-based analysis".[8] The report highlights a number of concerns that are material to the assessment of value for money. However, the report does not provide an assessment of whether the assumptions made by the Board of London Transport provided a reasonable basis on which to take the decision. Ernst & Young concluded that "London Underground's recommendation that the PPP proposals deliver value for money is a subjective one which is supported by its analysis".[9] London Underground and the Board of London Transport told the Committee that they had undertaken the process of developing the PPP "in order to get the funds to fix the tube".[10] It is not surprising therefore that their subjective assumptions support the approval of the PPP. The decision of the Secretary of State to proceed with the PPP on the back of such a vapid concluding statement from his independent advisers, Ernst & Young, must be questioned.

7. In his evidence the Secretary of State confirmed that the Ernst and Young report in accordance with their terms of reference had only reviewed the methodology used by LUL to evaluate value for money and that Ernst and Young had not commented on the value for money of the PPP schemes themselves. He further confirmed that his decision had been subjective, reflecting the balance of the evidence to him. It is very concerning that after four years, £100 million pounds of costs, this pivotal decision for the future of London is "subjective".

WHAT THE PPP OFFERS

8. The Secretary of State for Transport, Local Government and the Regions told Parliament that the PPP contracts will save £2 billion compared to the public sector over the first 15 years. There is no 15 year public sector comparator on which to base this claim. Neither London Underground nor Ernst & Young were able to support this claim. Indeed, such a claim flies in the face of the conclusions of the National Audit Office review of the PPP in December 2000. There is no 15 year public sector comparator and the figures quoted by the Secretary of State had no basis in any of the published reports. The apparent continued dominance of the highly constrained financial analysis as the basis for the decision-making process is ill-founded and mistaken.

9. The deal on the table today appears to be fundamentally different from that initially proposed. The PPP will not offer the level of infrastructure improvements that London Underground initially believed possible and desirable. There are clear differences of opinion on the extent of risk transfer. It is however apparent that the position on risk has moved dramatically in favour of the private sector companies and is still not fixed. The PPP no longer appears to remove, in any meaningful manner, the risk of the public sector footing the bill for poor performance in a difficult programme of infrastructure upgrades. The level of cost overruns to which the Infrastructure companies will be exposed before they can seek an extraordinary review is paltry compared to the size of the investment programme. Given that risk transfer was one of the key rationales for undertaking the PPP the fact that this has been seriously undermined must mitigate against proceeding with the PPP.

10. We are also concerned that there is no Public Interest Termination clause in the contracts. Ernst & Young stated in their review for the Secretary of State that:

"In our view, it would be a lower risk option for London Underground to have an express right to seek voluntary termination with an agreed mechanism in line with Treasury Taskforce Guidance. In particular, the obligation on the PPP contractor to act reasonably and mitigate costs would improve the value for money of the termination and enhance London Underground's negotiating leverage throughout the contract."[11]

The decision to proceed with an experimental contract structure without the inclusion of a Public Interest Termination clause is difficult to justify, does not follow Treasury Taskforce Guidance and seems likely to compromise further value for money.

ASSESSING THE PPP

11. Social cost-benefit analysis has been mixed in with value for money analysis in a hitherto unprecedented manner and in a manner outwith Treasury guidance. It is unacceptable that adjustments which fall outside of Treasury guidance and which have "a material effect in the financial analysis"[12] have been included in the assessment of a project of this magnitude. Unfortunately we have not been able to take any evidence from HM Treasury on this specific matter or more generally on the PPP. The decision to approve the PPP without an official review of the suitability of this methodology would demonstrate a lack of fiduciary duty on the part of the Secretary of State and the Treasury.

12. A theme throughout our inquiry has been the potential for conflict of interest amongst the very limited pool of advisers available to the parties involved. This is a concern shared by the Secretary of State.

ROLES AND RESPONSIBILITIES

13. London Underground told the Sub-Committee that the raison d'être of the PPP is to guarantee funding from the Treasury which it has failed to do over the past 40 years.[13] It is not clear however that the PPP offers any such guarantee. Indeed, funding restrictions have already led to the delay of work beyond the first review period and it is reasonable to assume that the prospect of this recurring at future review periods is very real. In the meantime, the risk of any shortfalls in Treasury funding will be borne by Londoners. Mr Godier, of London Underground Limited, told the Committee that there was no contract with the Government as far as the level of subsidy was concerned.[14] There are significant damaging implications of such shortfalls on local taxation or other transport expenditure should the anticipated funding not be forthcoming. The rationale for the PPP presented by London Underground further raises the question as to whether it is the Department for Transport, Local Government and the Regions that takes decisions on transport matters or the Treasury.

ALTERNATIVES

14. Neither the Department for Transport, Local Government and the Regions nor London Underground have developed a serious alternative to the PPP. Indeed, the Secretary of State cited the lack of an alternative as a good reason to proceed with the contracts.[15] The Treasury has shown itself unwilling to consider funding alternative options. There has been a failure on the part of both the Department for Transport, Local Government and the Regions and London Underground Limited. The failure to develop any alternative plan meant that the value for money test could only ever have one answer.

15. The improvements which the PPP will produce are much less than was originally expected. The Committee believes that an alternative to the PPP could be developed that would deliver greater benefits to the travelling public over the next 7½ years. In the last few years delays in improving the Underground have been caused principally by withholding adequate levels of grant support whilst the PPP was developed. Investment is needed urgently but with proper Government support it can commence at an early date. An alternative to the PPP would not lead to several more years of the status quo unless the Government delayed making a commitment to provide the same levels of funding which it has currently promised to the PPP.

16. It is a failure on the part of the Secretary of State that no appraisal has been undertaken as part of the decision-making process of the alternatives being put forward by TfL, which appear to this Committee to offer material and rapid benefits to the travelling public in London. The Secretary of State's evidence suggesting that Ernst and Young addressed this issue is mistaken.

Conclusions

17. £100 million has been invested in developing and assessing the PPP contracts. After an exhausting four year process there are considerable vested interests in seeing the deal completed. However, the evidence we have taken to date shows that the basis on which the decision has been taken is flawed. The shifting sands of the rationale for, and the assessment of, the PPP have lead to a process that has lost all credibility in the eyes of the public and professionals in the field. Parliament must now have the opportunity to have an unfettered debate on the decision to proceed with the PPP. It is essential that the Government allows Members a debate and vote in the House of Commons on a substantive motion on the future of the London Underground and the PPP.

1 Second Report of the Transport, Local Government and the Regions Committee, London Underground, HC (2001-02) 387-I. Back

2 London Underground Limited Public Private Partnership Final Assessment Report, London Underground, 7 February 2002. http://www.thetube.com/content/unblock/pppreport/ Back

3 HC Deb, 7 February 2002, cols1103-4W. Back

4 London Underground PPPs Value for Money Review. Independent Review for the Secretary of State for Transport, Local Government and the Regions, Ernst & Young. Back

5 HC Deb, 7 February 2002, col 1128 Back

6 HC Deb 7 February 2002 col 1128 Back

7 London Underground PPPs Value for Money Review. Independent Review for the Secretary of State for Transport, Local Government and the Regions, Ernst & Young. (Page 1) Back

8 Ibid. (Page 1) Back

9 Ibid. (Page 6) Back

10 Q109 Back