4 The 2010 periodic review
47. The poor relationship between Tube Lines on the
one hand, and TfL and LU on the other has continued into the periodic
review exercise. Under the PPP Agreement, LU and Tube Lines are
required to set out a programme of work for 2010-17 along with
estimated costs. Some tension in the process is inevitable because
the parties have conflicting objectives: Tube Lines wants to deliver
the work as cost-effectively as possible so that it can provide
dividends for its shareholders; TfL is seeking to maximise the
work done whilst minimising cost.
48. TfL and Tube Lines began planning for the periodic
review in 2009. Following informal discussions between the two
parties, it became apparent that the two organisations' estimates
of the work that needed to be done during 2010-17 diverged very
significantly. As negotiations between the two parties stalled,
both parties submitted to the PPP Arbiter their estimates of the
cost of an upgrade and maintenance programme from 2010-17, including
an extensive upgrade of the Piccadilly line. The second set of
projections were submitted by each party to the Arbiter, as required,
on 17 November 2009. The main difference between the two submissions
was "updating" to reflect the agreement reached between
Tube Lines and TfL on the scope of the work programme and to take
into account inflation. In total, Tube Lines' 17 November submission
proposed costs of £5.75 billion. London Underground considered
that the appropriate level of costs was £4 billion.
49. On 17 December, the Arbiter published his "draft
directions on costs and related matters" for the period 2010-17.
The Arbiter judged that the cost of works on the Jubilee, Northern
and Piccadilly lines over the seven and a half years from 1 July
2010 should be set at £4.4bn. According to Chris Bolt:
I have reviewed carefully the submissions from Tube
Lines and London Underground, and taken expert advice. On the
basis of my analysis, I consider that a company operating in an
overall efficient and economic manner and in accordance with Good
Industry Practice—the test in the PPP Agreement—could
deliver its obligations at a substantially lower cost than projected
by Tube Lines, though not as cheaply as suggested by London Underground.
50. The Arbiter reached his initial judgement by
comparing Tube Lines' estimated costs with similar projects undertaken
on other metro systems, a process he referred to as international
benchmarking. He found Tube Lines' estimated unit costs to be
significantly higher. In addition, the Arbiter explained that
part of the £1.35 billion difference between his estimate
and that of Tube Lines was a consequence of Tube Lines' poor performance
on the Jubilee line:
My assessment is that the notional infraco, which
is the standard I have to use for pricing, would have delivered
or could have delivered the Jubilee line on time and that as a
consequence about three-quarters of the work on the Northern line
would be completed in the first review period.[46]
Therefore, some of the costs that Tube Lines expects
to accrue in the second review period, should, according to the
Arbiter, have been borne by the company during the first period.
The Arbiter's judgement encouraged TfL and Tube Lines to make
further representations to his office before he published his
final guidance in "early March 2010".
51. The PPP Arbiter's final directions and guidance,
published on 10 March 2010, increased his initial estimate of
the cost of the work to be carried out by Tube Lines during 2010-17
by £65 million to £4.465 billion.[47]
Alongside this guidance, the Arbiter recommended that London Underground
should either: finance the £465 million shortfall between
its estimate and the Arbiter's final directions, or scale back
the work that it required Tube Lines to carry out during 2010-17.[48]
TfL's initial reaction to the Arbiter's guidance was that the
Arbiter had exceeded his powers by making directions on finance
and that TfL would keep its options open.[49]
IMPLICATIONS FOR THE FUTURE OF THE
PPP
52. The Arbiter's guidance for 2010-17 has led some
commentators to question whether Tube Lines and with it, in all
likelihood, the PPP itself has a viable future. If Tube Lines
is to deliver what it has agreed to, it will have to make up the
funding gap of £1.5 billion between its own cost estimate
and what TfL will pay. Tube Lines' shareholders (Bechtel and Amey)
must decide if they can afford to make up the difference or seek
to raise additional funds for Tube Lines' 2010-17 programme in
a very difficult financial environment. Alternatively, if the
management board of Tube Lines decides that neither option is
feasible, then the company's future involvement in the PPP will
be in doubt. The former Chief Executive, Dean Finch, told us that
Tube Lines would not follow Metronet into administration and that
no conclusion about the company's viability should be drawn from
his decision to leave his position as Chief Executive of Tube
Lines.[50]
53. The Arbiter's initial guidance also has implications
for TfL which will have to find an additional £400 million
to finance the work planned for 2010-17. If it cannot provide
the additional funding through further increases or additional
grants from the Government, it will need to review the scope of
its requirements for the next seven and a half years. In all likelihood,
this could result in fewer station refurbishments or less ambitious
track renewals.
54. The fall out from the PPP Arbiter's ruling on
the costs for the second review period may take a while to become
apparent. In the meantime, the process leading up to the Arbiter's
final ruling in March 2010 has subjected Tube Lines, responsible
for three Underground lines, to a great degree of scrutiny. The
level of transparency given to Tube Lines' project planning and
cost estimates is welcome; however, this degree of scrutiny is
currently not applied to London Underground, itself responsible
for managing improvements to seven Underground lines. As stated
previously, this situation is one that this Committee recommended
should be improved by granting the Arbiter more power to monitor
the performance of TfL.
46 Q 153 Back
47
www.ppparbiter.org.uk/output/Page1.asp Back
48
Tube Lines will be required to deliver the refurbishment of stations
and the completion of upgrades to the Northern and Piccadilly
lines. Back
49
TfL Press Release, Mayor and TfL: Arbiter's Directions show PPP
is "not delivering for Londoners and taxpayers"
10 March 2010 Back
50
Q 44 Back
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