Memorandum from Transport for London (TfL)
(PPP 12)
1. INTRODUCTION
1.1 Transport for London (TfL) welcomes
the opportunity to comment on the Committee's inquiry into the
London Underground Public Private Partnership (PPP). Our response
sets out an account of the performance of the PPP since its contract
commencement in 2003 and provides some commentary on the recent
PPP administration of two of the infrastructure companies, Metronet
Rail BCV Limited and Metronet Rail SSL Limited (the Metronet Infracos).
2. BACKGROUND
2.1 TfL was created in 2000 as the integrated
body responsible for the Capital's transport system. The primary
role of TfL, which is a functional body of the Greater London
Authority, is to implement the Mayor of London's Transport Strategy
and manage transport services across the Capital. London Underground
(LU) became part of TfL in 2003 and is responsible for operating
the LU rail network. It owns (in part or whole) 250 stations and
operates services on 12 lines.
2.2 Today LU is carrying more passengers
than ever before. On 8 December 2006, approximately 4 million
passenger journeys were made, the highest number in LU's 144-year
history; and in 2006-07 more than 1 billion journeys were made—the
highest ever annual number of passenger journeys. Last year also
saw the highest ever level of service with 69.8 million train
kilometres operated. At the same time the pace of the investment
programme continues to increase and is now much in evidence across
the Underground network.
2.3 With London's economic growth gathering
pace we anticipate Tube demand to grow by around 25% over the
next decade. The benefits of growth will only be experienced if
investment is sustained. The direct customer benefit of PPP capacity
increases is £12.5 billion with additional benefits to the
economy of London as a whole of £20 billion over the contract
life of the PPP.
2.4 As the Committee is aware, despite TfL's
concerns about the PPP structure, the Government adopted this
as its preferred solution for investing in the Tube. These concerns
are a matter of public record and will not be repeated again here.
TfL has committed to make the best of the position it inherited.
2.5 Under the 30-year PPP contracts, the
Infracos are responsible for the maintenance, renewal and upgrade
of LU's assets—its rolling stock, stations, track, tunnels
and signals. LU continues to have ultimate responsibility for
safety and is responsible for the delivery of all Tube services.
LU manages the PPP contracts, demanding strong performance from
Metronet and Tube Lines on behalf of the Mayor and the Government
and ultimately the millions who rely on the Tube each day.
2.6 Imperfect as it is, and despite the
high profile failings, the PPP has delivered tangible benefits
from the investment in the first four years.
3. METRONET ADMINISTRATION
3.1 On 18 July 2007 both Metronet Infracos
entered PPP Administration. Metronet's performance had been an
escalating concern for LU with the performance disparity between
Metronet and Tube Lines becoming ever greater since 2003. In November
2006, the PPP Arbiter published his first Annual Metronet Report.
LU's concerns about Metronet's performance were borne out by the
Arbiter's findings, which were that "neither Metronet BCV
nor Metronet SSL has carried out its activities, over the period
from 4 April 2003 to 31 March 2006 as a whole in an efficient
and economic manner and in accordance with Good Industry Practice".
This conclusion was a major factor in TfL calling for Metronet
to seek an Extraordinary Review in February 2007 as the only solution
for getting clarity on the cost overruns issue.
3.2 In June, Metronet requested an Extraordinary
Review of the BCV contract, claiming an additional £992 million
of cost overruns. Metronet further requested that £551 million
of the £992 million be paid in the current period, prior
to the conclusion of the Extraordinary Review because of its then
current liquidity position. The Arbiter issued a draft direction
on the latter request on 16 July to the effect that the Infrastructure
Service Charge should increase by only £121 million based
on his initial assessment of the appropriate level for the next
12 months for a company performing in an economic and efficient
manner in line with Good Industry Practice, but no payment should
be made before January 2008 by which time the Arbiter may well
have reached a definitive position on all the evidence. TfL maintains
that the Arbiter's initial decision assumed facts favourable to
Metronet and does not represent a likely outcome based on all
the evidence.
3.3 In the days following this draft finding,
both Metronet Infracos determined that they would not be able
to meet its obligations as they fell due and the directors of
each Metronet Infraco requested that the Mayor applied for the
Metronet Infracos to be placed into PPP Administration under the
provisions of the GLA Act, which status was granted on 18 July.
Three of the most serious of Metronet's failings
are set out below.
3.4 First, their basic maintenance performance,
which reduced Metronet's expected revenues. In 2006-07 all but
two Metronet lines (apart from the Central and Waterloo &
City lines), showed deterioration on 2005-06 availability performance
(lost customer hours). Performance in lost customer hours across
half the Metronet lines were below Metronet's bid expectation.
3.5 Metronet failed to heed the numerous
warnings from LU over basic maintenance. Since 2003, LU had repeatedly
called on both Tube Lines and Metronet to focus on basic asset
maintenance and reliability in order for the system to withstand
the stress brought on by upgrade works. The Victoria line for
example has suffered from insufficient attention to maintenance
and this has resulted in one of the most reliable LU lines becoming
one of the worst performing.
3.6 As a result of Metronet's spiralling
performance problems, in 2006-07 both Metronet Infracos incurred
sizeable financial penalties for their performance against contractual
measures (£22.4 million in total). Since the start of the
contracts, the two Metronet companies have incurred net abatements
of £23.9 million compared to a bid expectation of net bonuses
totalling £83.5 million for this stage in the contract. Therefore
total Metronet performance adjustments are over £107 million
worse than their original plan.
3.7 The second major failing was Metronet's
inability to plan and execute works effectively, as evidenced
by their high-profile track failures eg in summer 2006 when they
did not prepare the tracks for the summer heat, leading to speed
restrictions. This was one of Metronet's most prominent failings
which contributed to LU taking the extreme step of issuing an
Emergency Direction to Metronet in order to get this and other
matters resolved.
3.8 In addition, Metronet's performance
in delivering its station programme was seriously behind schedule
and substantially over budget by the end of 2006-07. In both 2004-05
and 2005-06, Metronet BCV failed to complete any of the stations
projects due by the original contract date. Only two of the seven
projects due in 2006-07 were completed in the year. For the sub-surface
contract, whilst eight stations were completed in 2005-06, they
were on average 34 weeks late, and the seven stations delivered
in 2006-07 were on average 28 weeks late.
3.9 Thirdly, there were significant structural
issues in Metronet's management, that were the root cause of the
above and that prevented Metronet from recovering its situation.
Metronet's contracting strategy for stations and civils (through
the conglomerate "Trans4m") had been the source of criticism
for some time due to the lack of competitive pricing and Metronet's
subsequent inability or unwillingness to apply the appropriate
pressure when programme milestones were missed and costs escalated.
Another fault in the contracting strategy, for example, in relation
to track and trains, was that the payment provisions did not adequately
incentivise performance—in some instances, fixed payments
were made which were neither linked to performance nor achievement
of milestones. With a myriad of sub-contractors and shareholders
involved in the Trans4m organisation and supply chain, effective
project management was vital, and fatally lacking. TfL believes
that this was one of the fundamental factors behind the companies'
cost overruns and ultimate collapse. Metronet was not in charge
of delivery of its obligations in any conventional sense, and
it lacked even the most basic financial controls and information
to address the situation.
The key events leading to Metronet's insolvency
are set out in Appendix 1.
3.10 Moving forward, the Mayor and the Government
are now considering options for ensuring delivery of the commitments
set out in the PPP contracts. TfL believes that it is in the best
interests of all parties for Metronet to exit administration as
soon as possible. TfL believes that this is the best way to maintain
the continued safe operation of the Tube network and to mitigate
possible performance and financial risks. To achieve this goal,
on 24 August TfL lodged with the PPP Administrators a formal Expression
of Interest for bidding for the assets of the Metronet Infracos
in order that TfL may take control of the operations of the Underground.
This would ensure stability for the day-to-day running of the
Tube and the ongoing upgrade programme, whilst options for the
long-term commercial structure are carefully considered.
4. OVERALL PERFORMANCE
OF THE
PPP
4.1 The Committee noted in its report of
March 2005 that "it would be wrong to claim that the PPP
had produced no benefits for the Tube". This remains the
case. Despite the failings of Metronet and the many frustrations
in managing such complex contracts, the PPP has delivered an improvement
in the Underground. Since the Committee last considered the Tube
PPP and in the last year in particular, the fruits of the investment
programme have begun to be seen by passengers and at the same
time as there has been a dramatic increase in passenger numbers.
4.2 61 stations have been completed ("delivered
into service") and a further 30 have been declared complete
by the Infraco and are under review by LU. In the last year, works
to provide step free access at Brixton have been completed, new
escalators at North Greenwich have been installed in time to support
the opening of the O2 venue, and the new station at Wembley Park
proved a showcase, coping admirably with its first FA cup final
in May 2007. Over 40 km of track were renewed during the year,
the first new Victoria line train arrived on the line for testing
and three-quarters of the District line train fleet has been refurbished.
4.3 It has been well-documented that Tube
Lines has been more successful at delivering its investment programme
to date. The station programme is on schedule and the Jubilee
line 7-car project, adding 17% more capacity to the line, was
delivered on time and on budget. This has been followed up by
tangible progress on the Jubilee and Northern line upgrades and
an improvement in Piccadilly line performance. Some elements of
the infrastructure renewal plan are running ahead of schedule.
While Tube Lines has been significantly more successful than Metronet,
its performance record is not unblemished. In particular, performance
of the Northern line has been of concern, leading LU, in December
2005, to issue a Corrective Action Notice (CAN) to Tube Lines.
Since issue of the CAN performance on the Northern line has seen
some improvement.
5. CONCLUSION
5.1 The PPP was not the vehicle of TfL's
choosing for the upgrading of London Underground. Imperfect as
it is, and despite the failings and frustrations, it has provided
a vital investment stream for the Underground.
5.2 The performance of Tube Lines tells
us that the PPP contracts are not unworkable and we believe that
Metronet's collapse was predominantly due to that organisation's
fundamental flaws rather than failure of the PPP contract per
se.
5.3 As the Committee noted in its last report,
ensuring competition within the PPP is crucial in ensuring it
can deliver the improvements originally envisaged. Lack of competitive
pricing and inadequate contractual incentives within Metronet's
own supply-chain was one of the critical factors leading to the
cost overruns and ultimate collapse of the two Metronet companies.
This will be an important lesson for the future.
5.4 TfL's first goal in the Administration
process which started on 18 July was the continued safe and reliable
operation of the Tube network. This has been achieved. TfL expects
to submit a formal bid for the assets of the two Metronet companies
in order to ensure stability for the day-to-day running of the
Tube and mitigation of performance and cost risks. This period
will enable the Mayor and the Government to consider options for
taking forward the PPP contracts.
5.5 Tackling the legacy of under-investment
is a complex and long-term task which has only just started. It
is critical that at this time, when it would be easy to be distracted
by the details of the arrangements that will succeed the Metronet
Infracos, that the bigger picture is not forgotten. The ultimate
goal, and the overriding concern of all of those who rely on it
everyday, is the investment in and modernisation of the Tube.
Regardless of the vehicle used to achieve this, it is vital that
funding for the programme is sustained and that all stakeholders
continue to support the aim of a renewed Underground system. Without
this commitment, London will not be able to sustain population
and job growth to the detriment not only of the Capital but the
rest of the UK.
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