1 Rationale for the Public Private
Partnerships
1. The Government decided that a PPP was likely to
be the best way of ensuring stability of funding for the maintenance
and renewal of the Tube, continued public sector management of
operations, and the benefits of private sector management of a
major infrastructure program. The Government considered four business
structures:
- a public sector unified business;
- a private sector unified business;
- separate private sector businesses split vertically
by group of lines; and
- horizontally split businesses (with operations
and infrastructure maintenance, renewal and upgrading carried
out by separate businesses).
It selected the latter option, with three private
sector Infracos and one public sector operator. Its chosen course
of action was influenced by delays and cost overruns on the Jubilee
Line Extension Project and London Underground's failure to deliver,
in full, target improvements in journey times when upgrading the
Central Line in the 1990s. The outcome of the PPP compared to
the objectives is set out in Figure 2.[2]
2. A key element of the initial work to assess the
value for money of the PPP was a Public Sector Comparator (PSC)
exercise. The PSC was defined as the assessed cost of acquiring
the same service through conventional funding, in which the public
sector retains significant management responsibility and exposure
to risk. In this case, the PSC was London Underground's estimate
of the cost to the public sector of independently procuring the
maintenance, renewal, and upgrade of Tube trains, station, track
and signalling as specified in the PPP contracts. The PSC included
adjustments to reflect the failure of the public sector to deliver
all project goals and historic overruns on projects such as the
Central Line upgrade.
3. The PSC is only one part of a value for money
assessment as a focus on costs alone is likely to miss out important
non-cost issues relevant to the decision, such as whether the
public sector could deliver the desired outcome, to time and cost,
and whether an effective output specification or performance regime
could be developed. The accuracy of PSCs is also subject to considerable
uncertainty. As we noted in our report on the Redevelopment
of the Ministry of Defence's Main Building, the outcome of this
form of long term financial comparison is very sensitive to the
costing of risk.[3]Figure
2: Outcomes against key objectives for the PPP
| Objective
| Aim at start of procurement
(1997/1998)
| Position at deal close (2002-03)
|
| Key objective: Value for money[4]
|
| A. Stable funding | Desire to bring an end to past unpredictable financing on an annual basis
| Achieved for the first 7½ years
|
| B. Little or no grant | Reduction over time in the amount of government subsidy
| Grant of around £1 billion per year to pay the PPP Infrastructure Service Charge
|
| C. Better value than a publicly run investment programme
| Cheaper than the Public Sector Comparator price
| Impossible to determine, due to periodic price review - see para 7
|
| Key objective: Private sector investment and expertise[5]
|
| D. Risk transfer to the private sector investors
| Risk of cost and time overruns, and underperformance should be largely transferred to the private sector
| Significant caps, caveats and exclusions on risk transfer to the private sector - see para 9
|
| E. Private sector expertise | Private sector companies would bring in project management expertise, and innovation
| Some expertise and the prospect of innovation brought in[6]
|
| F. Price competition within the PPP | A separate Infraco for all three line packages
| Bidding competition rules resulted in two Infraco owners[7]
|
| Key objective: Safeguarding the public interest
|
| G. A unified structure for passenger safety, ticketing and marketing
| Passenger safety, marketing and ticketing would remain in one organisation
| Passenger safety, marketing and ticketing responsibilities remain with London Underground which has also to manage retained risks that arise from separate PFI deals for improved ticketing, power and communications[8]
|
Source: National Audit Office, based on the references
4. The Government rejected a proposal by TfL to finance
the work though public sector bonds, taking the view that private
sector management of the infrastructure was more likely to be
effective than public sector contract management, and that the
extra cost of private sector finance would be outweighed by the
benefits, including better risk control. A bond option would have
saved some £90 million a year because of lower borrowing
costs and savings on remunerating equity shareholders, but would
have left more risk with the public sector. [9]
5. The Government was, therefore, unwilling to make
a special exception to the existing rules which prohibited a local
authority body such as TfL from raising debt in the capital markets.
Under the Prudential Borrowing regime, introduced from April 2004,
TfL is now able to use bonds for an investment of £2.9 billion
into its capital programme over the next five years.[10]
6. Tube Lines and Metronet were chosen as preferred
bidders in May 2001, although financial close was only achieved
in December 2002 for Tubelines and March 2003 for Metronet. The
bidders were therefore in a position of some negotiating strength
for over a year and a half. The Department had no formal back
up plan if the PPP deals were not completed but would simply have
simply turned the running of the Tube over to TfL.[11]
2 C&AG's Report (HC 645), Executive Summary, para
5 and paras 1.2, 1.5-1.6, 1.19 Back
3
Qq 150-158, 186; C&AG's Report (HC 645), paras 2.39-2.41;
C&AG's Report, The financial analysis for the London Underground
Public Private Partnerships (HC 54, Session 2000-01); 4th
Report from the Committee of Public Accounts, Private Finance
Initiative: redevelopment of MOD Main Building (HC 298, Session
2002-03) Back
4
Qq 30-35; C&AG's Report (HC 645), Executive Summary, paras
4, 4.3, Figure 2 and Appendix 3 (Figure 3.1) Back
5
Q 106; C&AG's Report (HC 645), paras 1.2, 4.1 Back
6
C&AG's Report (HC 644), para B2.5 and case example 5 Back
7
C&AG's Report (HC 645), paras 2.19 -2.21 Back
8
C&AG's Report (HC 644), para C2.1 Back
9
Qq 91, 119, 124, 145, 149; Ev 33-35 Back
10
Q 124; 2004 Spending Review announced 12 July 2004 Back
11
Qq 88-89, 169 Back
|
