Letter from the Director General, RALMS,
Department for Transport to Transport for London
I wrote to Tube Lines Group and its providers
of finance on 30 December 2002 setting out the Secretary of State's
role in relation to LRT, the Greater London Authority ("GLA")
and Transport for London ("TfL") (including any subsidiary
of TfL). Annex B to that letter (also attached to this letter
and to be read in conjunction with it) sets out the Secretary
of State's intentions in relation to the obligations of London
Underground Limited (LUL) when setting Transport Grant for the
GLA under Section 101 of the GLA Act or, pending transfer of LUL
to TfL, when determining grant under the LRT Act.
Further to that letter and to my letter to Bob
Kiley of 4 December 2002 I am writing to set out the Secretary
of State's intentions in relation to the funding of LUL, how he
would intend to review GLA transport grant in the event of unforeseen
circumstances in advance of the next Government spending review
and his intended approach at the next and subsequent spending
reviews.
Recognising that the PPP contracts have begun
(in the case of Infraco JNP) or will begin (in the case of Infracos
BCV and SSL) later than was expected at the time of promulgation
of the Funding Statement which forms Annex B to my letter to Tube
Lines Group and which was confirmed by the Government's 2002 spending
review, the Secretary of State intends to ensure that LUL is no
worse off as a result. He therefore intends to allow such underspend
as occurs during this financial year, and is needed next, to be
carried forward and added to grant for next year to achieve that
outcome. He also intends to adjust grant for the following year
if, in his view, it is needed for that purpose.
The Secretary of State also intends, in respect
of the years up to 2005-06, to make provision in addition to that
contained in Annex B of my 30 December letter in respect of such
sums as are incurred by LUL in consequence of its agreement with
Canary Wharf Limited (CWL).
The Secretary of State does not propose any
further changes to the levels of grant set out in 2002-03 prices
in Annex B to my letter of 30 December, those levels reflecting,
in his view, what is needed to fund LUL's obligations including
provision for management of risks associated with LUL's PPP and
other contracts. That letter states that, between Government spending
reviews, it is his intention that levels of GLA transport grant
should be reviewed in the event of major expenditure pressures
falling to LUL outside its Business Plan (and therefore unforeseen)
and any appropriate adjustments made. The Secretary of State will
consider whether such pressures might include sums falling to
be paid to CWL in the event of LUL failing to meet the terms of
the agreement referred to at paragraph 4 above provided that information
on performance of that agreement is provided to him on a regular
basis within the framework to be developed under paragraph 7 below.
The Secretary of State has recognised that it
will be desirable for TfL to establish a reserve provision from
which to manage LUL's future business risks and has identified
(a set out in Annex B to my 30 December letter) certain amounts
within GLA transport grant in the years up to 2006-07 to allow
TfL to build up such a reserve. Government will expect (under
the arrangements set out in paragraph 7 below) to be consulted
before any draw down such that it may lead to significant depletion
of the reserve. In these circumstances, should major unplanned
and unforeseen expenditure pressures fall to LUL such that that
reserve is significantly depleted, it is the Secretary of State's
intention that levels of grant should be reviewed in light of
the desirability of maintaining reserves at the level contained
in Annex B to my letter of 30 December and adjustments made such
that the reserve can be replenished to an appropriate level. Such
review would normally take place at each Government spending review.
Going forward, it is the Secretary of State's
view that Government and TfL should work together to allow better
planning and delivery within London Underground and hence to promote
better informed decisions in Government spending reviews and in
the annual determination of GLA transport grant. To that end,
Government will work with TfL to develop a protocol in relation
to LUL, covering a Business Plan which both parties believe to
be realistic, the provision of management accounts, objectives,
performance, areas of co-operation and exchange of information
and an approach to project evaluation.
It is the Secretary of State's intention that
GLA transport grant should be reviewed at each Government spending
review within the framework of the Funding Statement and that
protocol. The Secretary of State has already said that, at those
times, account will be taken in particular of changes to LUL's
forecast revenues (recognising that the funding provision set
out in Annex B to my 30 December letter assumes that LUL fares
will rise in line with the Retail Price Index), the expected effect
of inflation on London Underground's costs (both infrastructure
service charges and the London Underground operating company's
own costs) and projected payments under the PPP performance regime.
In the context of LUL's own costs, the Secretary of State recognises
that account will need to be taken of the costs associated with
the management of LUL's PPP and other contracts. In the light
of the framework to be developed under paragraph 7 above, the
Secretary of State also intends to take into account pressures
falling unavoidably to LUL under PFI contracts entered into by
LUL or LRT; the need for appropriate provision to rectify any
shortfalls as contained in the 2003 valuation of the LRT pension
fund and the costs of pension administration; the need for appropriate
provision for expenditure on Major Enhancements under the PPP
and on LUL Specified Rights under the PPP to the extent in both
cases that both parties agree on the need for such investments;
and the need for appropriate provision for any payments due under
the PPP in respect of working capital.
When considering the appropriate level of GLA
transport grant in relation to the matters covered in this letter,
it is the Secretary of State's intention that he would take account
of LUL's financial position alone and not that of TfL or any other
of its subsidiaries.
David Rowlands
4 February 2003
Annex B
Funding Statement
The Government is committed to supporting value
for money PPP projects and to assisting the development of PPP/PFI
in the local authority sector.
In setting Transport Grant for the GLA under
Section 101 of the GLA Act, or pending transfer for LT under the
LRT Act, the Secretary of State will take into account the obligations
of LUL under any PPP, and existing PFI, contracts. In particular,
within the total transport grant, the Secretary of State intends
separately to identify an element of grant to reflect the obligations
of LUL under the PPP contracts. It is his intention to do this
throughout the lifetime of the PPP contracts. It is recognised
that the average level of Infrastructure Service Charge is projected
to rise by some 25% in the Second Review Period compared to the
First Review Period, assuming no new obligations are introduced
in the Second Review Period.
It is the Secretary of State's intention that
this element of grant should be based on the difference between
LUL's Net Revenues as defined below (noting that LUL's costs reflect
the normal day-to-day operation of the Underground as well as
costs associated with the PPP and existing PFI contracts) and
Infrastructure Service Charge (ISC) payments.
— Net Revenues: The difference between
LUL's projected revenues and overall costs of the Operating Company
as agreed between DTLR and GLA[4]
and reflected in LUL's Business Plan. For these purposes the total
operating costs include the exercise of additional obligations
on LUL emergency step in, LUL Essential Works and Services, Intermediate
Works and other Exceptional Amounts. In the first period the projected
Costs and Revenues are:
| £m 2002-03 prices
| 2002-03 | 2003-04
| 2004-05 | 2005-06
| 2006-07 | 2007-08
| 2008-09 | 2009-10
|
| Traffic and other Revenues | 1,285
| 1,310 | 1,320 | 1,350
| 1,380 | 1,400 | 1,410
| 1,420 |
| Overall Costs of Operating Company | 1,175
| 1,185 | 1,155 | 1,070
| 1,040 | 1,100 | 1,120
| 1,100 |
| Net Revenues[5]
| 110 | 125 | 165
| 280 | 340 | 300
| 290 | 320 |
— ISCs: Underlying ISCs as set out in the Schedules
to the contract, or as subsequently determined by the Arbiter
following an Extraordinary Review of the ISC, plus base case expected
performance payments for all obligations within the PPP transaction
documents as at the time of initial signature, excluding amounts
to be agreed under Major Enhancement Agreements. Current Government
spending plans are based on the expectation that, in the first
period, these will be:
| £m 2002-03 prices | 2002-03
| 2003-04 | 2004-05
| 2005-06 | 2006-07
| 2007-08 | 2008-09
| 2009-10 |
| Infrastructure Service Charges | 975
| 1,015 | 1,030 | 1,195
| 1,205 | 1,210 | 1,230
| 1,330 |
The Secretary of State intends to include within Transport
Grant additional provision as necessary to reflect LUL's commitments
under the PPP contracts in relation to Infrastructure Company
expenditure on Safety Change and Qualifying Change of Law provisions.
This will be reimbursed to LUL on an annual basis reflecting actual
expenditure that occurred in the previous year. The Secretary
of State also intends, as he deems appropriate, to include provision
for Major Enhancements as envisaged in the PPP contracts. In the
first period these are:
| £m 2002-03 prices | 2002-03
| 2003-04 | 2004-05
| 2005-06 | 2006-07
| 2007-08 | 2008-09
| 2009-10 |
| Major Enhancements | 5 | 30
| 65 | 90 | 150
| 140 | 110 | 90
|
The Secretary of State also intends, as he deems appropriate,
to include provision for the exercise of LUL specified rights.
No such provision is made in the current figures.
Reserve provision
The Secretary of State recognises that it would be desirable
for TfL to establish a reserve provision from which to manage
LUL's business risks. To enable TfL to build up such a reserve,
the Secretary of State intends to allow the following amounts
within GLA Transport Grant:
| £m 2002-03 prices | 2002-03
| 2003-04 | 2004-05
| 2005-06 | 2006-07
| 2007-08 | 2008-09
| 2009-10 |
| Reserve provision | 60 | 40
| 40 | 20 | 10 |
0 | 0 | 0 |
This allows LUL to build accumulative reserve provision as
follows:
| £m 2002-03 prices | 2002-03
| 2003-04 | 2004-05
| 2005-06 | 2006-07
| 2007-08 | 2008-09
| 2009-10 |
| Accumulative provision | 60 |
100 | 140 | 160 |
170 | 170 | 170 |
170 |
On the basis of the above, the Secretary of State intends
to allocate the following levels of GLA Transport Grant (excluding
the expenditure on Safety Change and Qualifying Change of Law
provisions) in the first period:
| £m 2002-03 prices | 2002-03
| 2003-04 | 2004-05
| 2005-06 | 2006-07
| 2007-08 | 2008-09
| 2009-10 |
| Transport Grant provision | 930
| 960 | 970 | 1,025
| 1,025 | 1,050 | 1,050
| 1,100 |
The Secretary of State will expect LUL to abide by the PPP
contracts and their terms and will also expect TfL to abide by
the terms of its guarantee.
The financial outlay represented by future Transport Grant
will be identified within the Government's current spending plans
and DTLR's 10 year Transport Plan.
It is the Secretary of State's intention that Transport Grant
should be reviewed at each Government spending review. Account
will be taken in particular of changes to London Underground's
forecast revenues, the expected effect of inflation on London
Underground's costs (both Infrastructure Service Charges and the
London Underground operating company's own costs) and projected
payments under the PPP performance regime.
Between Government spending reviews, it is the Secretary
of State's intention that levels of transport grant should be
reviewed in the event of:
— Major expenditure pressures falling to LUL under
the PPP contracts outside its Business Plan (eg catastrophic asset
failure, or any other substantial changes to the ISC or liabilities
arising under the PPP contracts).
— LUL or the LUL Nominee becoming liable to pay
the Novation Price (as defined in Schedule 5.16 to the Service
Contract and which could include the Underpinned Amount) in any
situation of contract disposition or pursuant to the put option
agreement between LUL and the Lenders.
4
Or as proposed by DTLR if they are still to be agreed with GLA
when the comfort letter is issued. Back
5
These figures reflect current projections. Back
|
