Memorandum from the London Assembly Transport
Committee (PPP 11)
1. INTRODUCTION
1.1 The London Assembly Transport Committee
has followed the progress of the PPP contracts since their inception.
It conducted two in-depth reviews of performance: "The PPP:
Two Years In" and "A Tale of Two Infracos". It
has recently questioned in detail the key players in the PPP Administration
of Metronet.
1.2 The Committee has set up a webpage with
all the latest information it has gathered on the PPP Administration,
and its previous work: http://www.london.gov.uk/assembly/scrutiny/transport_ppp.jsp
1.3 This paper outlines the conclusions
and recommendations that the Committee made in its previous reports,
and summarises the information from its recent hearings about
the PPP Administration.
2. PREVIOUS PERFORMANCE
REVIEWS
Initial findings—June 2005
2.1 "The PPP: Two Years In", the
Committee's first look at the performance of the PPP contracts,
found that Infraco performance was inconsistent and varied. Whilst
there were some improvements compared with pre-PPP performance,
for example on availability of trains, much of the performance
was well below target. Given the inadequacies of the Tube prior
to the PPP, as well as the large sums of money made available
through the contracts, the Committee was disappointed at the progress
that had been made.
2.2 The Committee identified several problems
that raised concerns for the future of the contracts. The rate
of asset renewal, which rapidly accelerates after the first 7½
year period, was behind schedule after only two years and subsequently
scaled down. Asset renewal is the upgrading of major infrastructure,
for example, signalling, lifts, escalators and track. For the
planned renewal of lifts and escalators in the first 7½ year
period, Metronet revised its figures from 58% to 44%, and Tube
Lines from 65% to 51%.[57]
2.3 Part of the problem arose from the asset
knowledge base being so poor prior to the contracts being awarded
and the work began: the actual state of the Tube was relatively
unknown. Therefore the targets for many projects had to be revised,
particularly for track and signalling work, and these have potentially
the greatest impact on passengers.
2.4 There were also early signs of poor
project management. The rate of engineering overruns was far too
high, 278 in the first two years. This had a frequent impact on
the morning rush hour. Overnight and weekend work has been built
into the PPP to minimise disruption to the network. However, the
marked increase of overruns since the Infracos took over responsibility
had the opposite effect. Metronet's former Executive Chair, John
Weight, described his company's performance as "unacceptable"[58]
to the Committee and resigned shortly afterwards.
2.5 The Committee also expressed its concerns
over the station refurbishment programme. Metronet's performance
was particularly bad. Its station renewal programme was 15 weeks
behind schedule after two years.[59]
2.6 The Northern Line, Tube Lines' responsibility,
performed particularly poorly for the first two years of the PPP.
It had by far the most signal and point-related failures and track
delays of any line, and its train availability was almost 40%
below the agreed benchmark. The Northern Line's performance was
so poor, that Tube Lines suggested full line/branch closures to
accelerate the rate of renewal of the track and signalling. Ultimately
this was deemed unnecessary, however, as performance on the line
improved overall.
Emerging themes—January 2007
2.7 The Committee's second performance review
of the PPP returned to many of these themes. Four years into the
contracts and a sharp dividing line between the performances of
Tube Lines and Metronet seemed to be emerging. The Committee concluded
"Tube Lines has demonstrated that the PPP can work. Metronet
has demonstrated that the PPP can fail".[60]
2.8 Though there were exceptions, Tube Lines
management and delivering was generally impressive, and Metronet's
was poor. Tube Lines completed its station renewal programme for
the first 7½ years ahead of schedule and the Piccadilly Line
performed 70% in excess of basic standards. Overall Metronet remained
behind in its station renewal programme, though it did improve
its rate of completion.
2.9 The Northern Line, under Tube Lines'
management, continued to perform poorly and the Committee found
that these were due to a Private Finance Initiative (PFI) contract
with Alstom agreed prior to the PPP. The Committee found: "Its
terms and conditions are considerably less robust than those set
on other maintenance contracts in the PPP".[61]
The Committee understood that Tube Lines were renegotiating this
contract with Alstom in order to overcome these problems.
2.10 Many of Metronet's lines, such as the
Bakerloo and Victoria Lines performed well below basic standards
with frequent delays. There were inconsistencies in aspects of
performance between different lines, such as the performance of
fleets that were of the same age. For example, the Bakerloo Line
had twice as many failures as the Victoria Line, despite the fact
that the fleets are the same age. Work to prepare District and
Circle Line track for summer conditions had not been adequately
done, despite repeated warnings from London Underground.
2.11 The Committee identified differences
in the way that the two Infracos managed their contracts. Tube
Lines aggressively pursued its targets through competitive tendering
processes and additional spending, and demonstrated impressive
results whilst making a healthy profit. Metronet appeared to be
blighted by a poor management structure and a lack of market discipline.
Much of their work was done by their own shareholders, without
competitive tendering. There appeared to be a lack of incentive
or a corporate structure to ensure work was done on time and to
budget.
2.12 The Committee found that both Infracos
had difficulties over differences of opinion with London Underground
over scoping and design for station refurbishments. Final costs
were well over what had been forecast and projects were subject
to long delays. Tube Lines' approach was to undertake the work
that London Underground requested. At the completion of the project,
Tube Lines used the arbitration process to negotiate over what
they saw as differences to what had been initially agreed and
reclaim additional costs. By contrast, Metronet did not start
work on stations until all differences had been resolved, leading
to lengthy delays. Tube Lines demonstrated that it was able to
learn from early difficulties, Metronet did not.
2.12 In November 2006, the PPP Arbiter delivered
his first annual report on Metronet and discussed it with the
Committee.[62]
He found that Metronet was not operating in an efficient or economic
manner and often not to Good Industry Practice (for example, the
work done to prepare the District and Circle lines for summer
weather). He also discovered a pattern that appeared to show that
Metronet was paying its shareholder-suppliers for work that had
not been done.
2.13 The Chair and Chief Executive of the
company were appointed from within its composite companies and
therefore had a lack of independent oversight. The Committee strongly
criticised the poor management structure of Metronet: "A
clear line of responsibility and accountability needs to be established
between the work done on the ground and those charged with overseeing
that work".[63]
2.14 The Committee made a number of recommendations
to improve Metronet's corporate structure. The Committee had previously
endorsed the PPP Arbiter's call for a non-executive Chair, which
Metronet heeded. The Committee went further and called for Metronet's
board to have a majority of independent members to ensure any
casting vote was an objective one. It also recommended that Metronet
should contract out its station and track work on a competitive
basis.
2.15 The Committee considered the implications
of a possible Extraordinary Review. It emphasised that Londoners
should not have to bear any additional costs if London Underground
was found liable for any of the additional funding claimed by
Metronet. Finally, the Committee recommended that the Government
prepare for the possibility of stripping Metronet of some of its
responsibilities on the basis that the management of nine out
of the 12 lines was too much for any company to take on within
the PPP contracts.
3. THE PPP ADMINISTRATION
AND THE
EXTRAORDINARY REVIEW
3.1 On 11 September, the Committee discussed
the PPP Administration with Alan Bloom, joint PPP Administrator,
Tim O'Toole, Managing Director of London Underground and Chris
Bolt, the PPP Arbiter. The Committee's key findings from the meeting
can be found on the Committee FAQs: http://www.london.gov.uk/assembly/scrutiny/transport_ppp_faq.jsp
3.2 The Committee has also written to the
Administrators for additional information in the light of emerging
findings from the Administrators and Arbiter. A detailed breakdown
of the drawdowns made on the loan facility are contained in the
letter entitled "Further information on the funding costs
of the Administration", found under the "related documents"
section.
3.3 The Committee recently wrote to the
Administrators (letter dated 24 September which can be found under
"related documents" on the website above) seeking further
clarification of how the valuation of the companies would fully
take account of the Arbiter's recent "initial thoughts"
on the Extraordinary Review. In these, the Arbiter had stated
that Metronet BCV could be due an increase in the Infrastructure
Service Charge (ISC) of between £140 million and £470
million. The Arbiter also found that Metronet SSL could be due
an increase in the ISC of between £290 million and £650
million.
3.4 Such an increase in the income of the
companies would appear to have an impact on their value and therefore
whether they are attractive to potential buyers. The Administrator
told the Committee that Metronet's PPP contracts were its main
asset. It appears that an increase in the ISC, as proposed by
the Arbiter, would increase the value of these assets. London
Underground has stated that it does not believe the contracts
will be marketable and that it would therefore like to take the
management of the contracts in-house.
3.5 The Chairman of the London Assembly
Transport Committee would be happy to attend one of the Select
Committee's meetings on this topic to discuss these issues further.
October 2007
57 "The PPP: Two Years In", London Assembly
Transport Committee, 2005, para 2.15. Back
58
Ibid, para 3.6. Back
59
Ibid, para 2.17. Back
60
"A Tale of Two Infracos", London Assembly Transport
Committee, 2007, p 3. Back
61
Ibid, para 3.48 Back
62
Available at: http://www.ppparbiter.org.uk/files/uploads/n_guidance/2006112012398LaMR%202006%20final%20guidance
.PDF Back
63
Ibid, para 3.31. Back
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