House of Commons - Transport - Written Evidence

Select Committee on Transport Written Evidence

Memorandum from the Department for Transport (PPP 08)

INTRODUCTION

1. By the mid-1990s it was widely recognised that the Underground had suffered from decades of under-investment and that the continued uncertainties about future funding levels had badly affected the reliability of passenger services. London Underground (LU) also had a poor record of delivering major infrastructure projects and maintenance programmes on time and on budget. There were substantial cost overruns on the Jubilee line extension and the Central line upgrade (both in excess of 30%) and on a number of other smaller renewal programmes.[28] Neither major project was completed on time nor delivered the expected improvements in journey times.

2. To address this, the 1997 Labour Party manifesto proposed a new public private partnership (PPP) to improve the Underground, safeguard its commitment to the public interest and guarantee value for money for taxpayers and passengers. In March 1998 the Government signalled its commitment to substantial extra investment in the Underground and announced that LU would be restructured to deliver two key aims:

— Keeping LU as a single unified body in the public sector with responsibility for operating passenger services; and

— Utilising the private sector's capacity in a PPP to overcome the investment backlog, and maintain and modernise infrastructure.

3. LU considered a number of alternative structures during development of the PPP before concluding that the best practical and value for money option was to split the network into three infrastructure companies each with responsibility for a number of individual lines. This structure, together with the partnership approach and proposed performance regime underpinning it, was supported in general by the industry.

4. In 2002 the Government gave an unprecedented statement of intent to provide long term funding to the Underground, averaging more than £1.1 billion a year up to 2009-10. The PPP, together with this funding, was designed to enable LU to deliver earlier a modern system that will provide passengers with a better and more reliable service, and enable the network to meet future passenger demand.

THE PPP CONTRACTS

5. Under the 30-year PPP agreements the private sector companies maintain, renew and upgrade the Underground's infrastructure while LU remains responsible for delivering passenger services. The PPP companies have specific obligations to deliver certain projects (eg station refurbishments and line upgrades) by particular dates and a more general obligation to maintain assets in accordance with the principles of whole-life cost management. This requires them to fully consider the future cost of maintaining the asset throughout its working life, as well as its initial purchase and installation cost.

6. The PPP also includes a performance payment regime which provides incentives for the companies to perform better than the benchmark measures set out in the contracts, while abatements (financial penalties) are imposed for below benchmark performance. Payments to the PPP companies reflects their performance in three key measures:

— Availability; which reflects whether the assets (trains, track etc) are working and available for LU to deliver passenger services. It is measured in delays to passengers (lost customer hours), weighted depending on location and time of the delay;

— Capability; which is a long-term measure of a line's capacity, ie its ability to move more people and reduce passenger journey time. Most improvement under this will be seen when the line upgrades, which are currently underway and are planned to be delivered from 2009 onwards; and

— Ambience; which indicates the quality of the passenger environment, including cleanliness, information and general condition of the stations and trains.

DELIVERING REAL BENEFITS FOR PASSENGERS

7. The PPP is delivering benefits in performance against the background of continuing growth in demand and an unprecedented level of works being carried out on the network. The Underground is carrying more passengers than ever; over 1 billion journeys were made in 2006-07, 21% above the 832 million passengers carried in 1997-98. Between 1997-98 and 2006-07 LU has increased the annual train kilometres run by 12½%, to nearly 70 million and over 94% of scheduled services were run in 2006-07. LU's customer satisfaction last year was also at the highest level since 1990-91.

8. Availability is currently a key indicator of PPP performance until the line upgrades are delivered. To date there has been a wide disparity of performance between the Underground lines, reflecting the variation in the condition of the assets, but also the performance of the PPP companies.

9. The latest availability performance figures[29] show that of the three lines that Tube Lines are responsible for under their PPP agreement, two (the Piccadilly and Jubilee lines) are performing significantly better than the benchmark measure. The Northern line continues to present a challenge with performance so far this year running at 18% worse than the benchmark figure. To address this performance Tube Lines and LU have accelerated the track renewal programme and are looking at ways to improve the train fleet's reliability.

10. Of the nine lines which are the responsibility of Metronet under its two PPP agreements, six (the Bakerloo, Circle, East London, Hammersmith & City, Metropolitan and Waterloo & City) are performing better than the required benchmark figure. The major improvement in performance on the Waterloo & City line reflects the benefits of the upgrade completed last year.

11. Performance on the three remaining lines is running worse than the benchmark figure; 15% in the case of the Central, 17% on the District and on the Victoria it is particularly disappointing, running at 61% worse than benchmark.

12. Long term improvements within the PPP contracts include:

— Track: Over 115 km of track (14% of the network) has been renewed, with delivery on some lines ahead of schedule;

— Waterloo & City line: A fifth train is now in service during the peak periods, providing a 20% increase in capacity. A £40 million upgrade has seen improved reliability and a reduction in average journey times;

— Jubilee line: Four new trains are now available and a seventh carriage has been added to all trains, bringing about a 17% increase in capacity. Work on a new signalling system is ahead of the contract date for delivery in 2009;

— Piccadilly line: The extension to Heathrow Terminal 5 is on schedule to be completed by March 2008;

— Northern line: Work on a new signalling system is ahead of the contract date and should be completed before the Olympics;

— Victoria line: The first new trains are being tested, while work on the signalling and power upgrades is broadly on schedule;

— District line: 55 trains have been refurbished to date. A refurbished train is being returned to service every two weeks and all trains should be completed by 2009.

SAFETY

13. Passenger safety is of paramount importance. The Underground is a very safe mode of transport and its safety record compares favourably with other Metro systems of a similar age, particularly in key areas such as derailments, collisions and platform-train interfaces.[31] Customer injuries average 1.5 persons per 10 million journeys, and the majority of fatalities on the network are due to trespass or suspected suicides.[32]

14. LU retains overall responsibility for passenger safety on the network and the Office of Rail Regulation, through Her Majesty's Railways Inspectorate (HMRI), regulates health and safety on the Underground. It is a legal requirement that LU has appropriate safety management systems and procedures in place to ensure staff and customer safety which have been accepted by HMRI. Under the PPP arrangements LU monitors the PPP companies' safety performance, audits their compliance with their contractual safety cases and LU's own standards, and agrees an annual Safety Improvement Programme.

15. LU's Safety Action Tracking System records progress against the Safety Improvement Programme. For the fourth year in succession there has been an improvement in the proportion of actions completed on time and in 2006-07 all three PPP companies achieved improved levels of compliance with their contractual Safety Cases than the previous year.

16. The table below provides figures for derailments, broken rails and signals passed at danger (SPADs) since 2001.[33]


Year	2001	2002	2003	2004	2005	2006	2007[34]

Train Derailments[35]	1	1	6	4	4	2	1
Broken Rails	29	26	32	51	45	29	9
Category B SPADs[36]	180	143	143	221	166	171	158

17. The number of train derailments of all types has fallen since 2003. Within these figures the number of passenger train derailments while in service remains very low. These incidents have averaged at just over one per year over the last 15 years or so, but LU recently went 37 months between such incidents.[37]

18. The figures for broken rails reflect the ageing nature of LU's track and the increase in both volume of trains and passengers. The PPP, through improved rail inspection technology, asset maintenance and fault detection has led to an increase in the number or broken rails detected before they represent a safety hazard to passengers. The reduction since 2005 is encouraging and reflects the PPP companies accelerated track renewal programme, at about four times the historic average.

19. The increase in signals passed at danger (SPADs) reflects a combination of the failure of ageing signalling equipment and greater emphasis on reporting incidents. However, the presence of LU's safety protection systems fitted throughout the network means that the risk of a collision following a SPAD is extremely low. Again the signal system upgrades planned for the majority of lines will address this issue.

VALUE FOR MONEY

20. Ensuring value for money for taxpayers and passengers was a key consideration when both the Department and LU concluded that a PPP structure was the best option. In addition to the value for money assessment carried out by LU, the Government commissioned independent advice that confirmed that LU's value for money analysis was robust.[38] The Committee of Public Accounts report[39] noted that the key principles in the Treasury's Value for Money Guidance had been adopted for the PPP, and that when both the Department and LU assessed the PPP they had considered wider, non-quantitative factors alongside the Public Sector Comparator. This included considering the strategic benefits, the ability to create a partnership and the risk share between public and private sectors.

21. The PPP contracts include a number of mechanisms for ensuring that value for money is secured over the long term:

— an outcome based performance and payment regime that links payments to the delivery of services at a price agreed with LU;

— an obligation on the companies to demonstrate an efficient and economic whole-life cost approach to asset management;

— the use of an independent Arbiter, established by statute, with powers to determine an efficient and economic price for services where LU and the companies are unable to agree a price. The Arbiter provides an important assurance of value for money in the PPP agreements that allows for possible changes to the scope of the work, the re-specifying of requirements, and re-pricing of services as part of the Periodic Review which occurs every 7½ years. Revisions to the price at these breakpoints in the agreements will need to meet the tests of efficiency and economy; and

— under both Metronet agreements the Arbiter can be asked to undertake an annual performance review to show the extent that the company is meeting the criteria of efficiency and economy and Good Industry Practice, contained in the PPP agreements.

22. The PPP also allows LU to procure additional works outside the contracts from alternative suppliers that enables LU to benchmark prices and test the price competitiveness of the PPP companies.

RISK SHARING

23. When signed the PPP agreements struck a balance between the level of risk transferred to the private sector and that retained in the public sector. The table below[40] sets out how the key risks were allocated under the PPP agreements.

24. The PPP agreements are outcome based and expose the companies to risk of performance payment abatements if the contractual targets are not achieved. The targets demand enhancements by fixed dates, ie the Jubilee line requires a 48% increase in capacity and 22% reduction in journey times by November 2009 compared to when the contracts were signed. The risk for the PPP companies is that failure to deliver the line upgrades and enhanced performance by the contract deadlines will mean a step-change in abatements. This will be exacerbated if the cost of the upgrade exceeds the budget provided in their bid through the PPP Company's own inefficient and uneconomic performance.

25. Where risk more properly sits with the public sector then this has been retained by LU, such as passenger fare revenue, which can be subject to variations beyond the PPP companies' control.

26. Other risks have been shared, such as where the asset condition was unknown at the time of PPP procurement (known as grey assets). The National Audit Office[41] acknowledged that in these circumstances seeking to transfer too much risk would be likely to lead the PPP companies to over-compensate on grounds of uncertainty. This would have caused them to build in bigger contingency provisions within their bids, leading to a higher price that would not have represented value for money for the taxpayer.

ALLOCATION OF KEY RISKS UNDER THE PPP


	Risk	LUL	PPP Co	Shared

Revenue	From passenger demand	E
	From meeting performance targets		E
Safety	In passenger operation eg driving at the appropriate speed; change in safety law	E
	In provision of assets that are "fit for purpose" with As Low as Reasonably Practical Risk		E
Costs	Of Infrastructure work eg design and construction of new trains		E
	Of operations eg cost of drivers	E
	Of inflation (indexed)			E
	Of rectifying the health of unclassified "grey assets" eg deep tunnels			E

NOTE: Net cost/revenue overruns are caped at £200 million for Tube Lines in the first 7½ year period and £50 million for each of the two Metronet contracts if they are acting in an "efficient and economic" way.

METRONET IN PPP ADMINISTRATION

27. The PPP Administration of Metronet should not in itself affect passenger services on the Underground. The GLA Act 1999 provides that PPP Administration must encompass both the protection of creditors' requirements and keeping passenger services running safely and effectively, until the PPP company is transferred out of PPP administration.

28. LU have made clear that the overriding priority continues to be the provision of a safe and reliable Underground service for passengers, with the continuance of Metronet's maintenance and renewal activities pending transfer to a new company.[42] To date, LU have reported no safety concerns arising from the Metronet PPP Administration.

29. The PPP Arbiter's Annual Review of Metronet's performance for the three years to 31 March 2006[43] identified areas of weakness and potential for costs considerably higher than those provided under the contracts. On 21 June 2007 Metronet requested that the independent PPP Arbiter conduct an Extraordinary Review (ER) of its BCV contract. ER is a contractual mechanism that, among other things, enables the PPP companies to seek additional payment to meet cost overruns ahead of a periodic review. The ER process involves the Arbiter making a judgement about the costs that an economic and efficient PPP company would have incurred in delivering the same outputs as the Metronet company.

30. To allow a PPP company to perform its obligations pending the completion of an ER, the Arbiter can also award an "interim" payment. Metronet accordingly sought an interim award of £551 million from the Arbiter who, on 16 July published a draft Direction which provisionally concluded that an efficient and economic company in Metronet's circumstances would be entitled to an interim award of £121 million.[44] Metronet concluded on 18 July that such an award would be insufficient to keep the company afloat, and Transport for London (TfL) proceeded to serve the Mayor's petition for PPP Administration of both Metronet companies.

31. On September 2007, the Arbiter published his Initial Thoughts on the ER.[45] The Arbiter's provisional view, based on representations from LU and Metronet, was that aspects of Metronet's operations were not efficient and economic (eg deficiencies in the supply chain and governance arrangements) and that the costs associated with these would not be allowable.[46] This suggests that it was failures in the management of the Metronet companies that were to blame for a large proportion of the cost overruns that led to their collapse.

32. It is for the PPP Administrators, working with LU, TfL and the Mayor, to identify the best outcome from the PPP Administration process. However, we share TfL's objective that the Metronet contracts should be transferred out of PPP Administration in the minimum time necessary. We are working closely with TfL, LU and the PPP Administrators to understand the full implications of any potential solutions and deliver a long-term outcome which:

— secures the best achievable value for money;

— is affordable;

— addresses lessons to be learned; and

— enables the most effective possible transfer of risk into the private sector.

October 2007

28 London Underground Public Private Partnership Final Assessment Report published on 7 February 2002, updated on 3 May 2002. Back

29 London Underground Managing Director's Performance Reports. Back

30 61 stations have been delivered into service and accepted by LU. A further 30 have been declared complete by the PPP companies. Back

31 Community of Metros (CoMET) Benchmarking Report, February 2007. Back

32 Office of Rail Regulation's "Railway Safety Statistical Report 2006" reported 19 suicides and trespasser deaths out of 22 fatalities on the network, their "Annual Report on Railway Safety 2005" reported 24 out of 28 respectively. Back

33 Figures provided by Her Majesty's Rail Inspectorate. Back

34 2007 figures, provided by LU, are for provisional up to the end of September. Back