Select Committee on Transport Written Evidence


Supplementary memorandum by Jarvis Rail (FOR 110A)

LEVEL OF RETURN ON JARVIS CAPITAL INVESTMENT IN LONDON UNDERGROUND

  The Committee asked Jarvis to outline the level of return we receive from London Underground, in the context of our capital investment in the Tube Lines project.

  Jarvis is not guaranteed any particular level of return on its financial commitment of £60 million to the Tube Lines project. The level of return that it in practice receives will depend on the performance of the Tube Lines businesses, as the operational, capital expenditure, debt service and administration costs all have to be met before any distributions to shareholders.

  However, certain assumptions were used in the financial modelling agreed with London Underground, the Department for Transport and HM Treasury. On the basis of that modelling, a post tax return on the sponsors' committed capital (£180 million in aggregate) of 13.0% (after adjusting for inflation) could be predicted over the 30 year live of the contract. The actual cash flows that would produce this return are heavily weighted to the later years of the project, once the capital works have been completed. Tube Lines Ltd will pay no dividends to its Shareholders until year eight.

  The 13% return, which is not guaranteed, reflects Jarvis (and its fellow sponsors') cost of capital and a risk premium appropriate for this complex and relatively contentious project, where the actual dividends do not flow until year eight. A post tax return of 10%-15% is the approximate usual range for project financings, depending on the perceived level of risk involved.

THE NUMBER OF SUB-CONTRACTORS TUBE LINES IS USING ON LONDON UNDERGROUND

  Tube Lines inherited a large number of sub contractors carrying out maintenance activities when it was awarded the PPP contract in December 2002. Tube Lines currently has 41 principal sub contracts in its maintenance activities and continues to review these legacy contacts to establish where appropriate those that it wishes to take back in house to be delivered by it's direct labour force.

  Indeed when Tube Lines took over responsibility for the Jubilee, Northern and Piccadilly lines in January 700 out of 2500 staff were contractors. Tube Lines has a policy of converting many of these posts into permanent jobs. The programme has already commenced with the conversion of around 300 staff to employees.

David Clarke

Strategy Director

5 November 2003


 
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