Memorandum from London TravelWatch (UPP
03)
1. INTRODUCTION
London TravelWatch is the official body set
up by Parliament to provide a voice for London's travelling public,
including the users of all forms of public transport. Our role
is to:
— monitor trends in service quality.
Our aim is to press in all that we do for a
better travel experience all those living, working or visiting
London and its surrounding region.
2. THE INQUIRY
London TravelWatch welcomes the House of Commons
Transport Committee's further inquiry, which will build on its
previous work, and will consider:
— What contractual arrangements are appropriate
for the future?
— What risks are associated with the PPP
arrangements with Tube Lines?
— What impact is the current economic situation
having on transport PPP and PFI schemes and what are the financial
implications for other transport schemes?
— What role has the Government played in
these matters?
Recently, we have worked closely with the London
Assembly Transport Committee on this issue, and attached as Appendix
A is our written evidence to them.[11]
3. GENERAL PRINCIPLES
OF THE
PPP
In general terms Public Private Partnerships
(PPP) are typically characterised by the following features:
— long term relationship between the public
sector and a private partner for the delivery of a project, typically
contracts are between 15 to 30 years;
— funding is provided by the private partner,
however some level of public funding may be included to complete
the funding requirements of the project;
— the private partner is typically involved
in all levels of delivery of the project the objectives of which
have been defined by the public sector; and
— a transfer of risk takes place from the
public to the private sector. This does not mean that the public
sector is left without risk, but much of the risk associated with
a portion of the financing, the delivery and operation of the
project would typically be transferred. The actual distribution
of the risk is dependent on the ability of each party to be able
influence and control the risk. The public sector will therefore
retain a substantial amount of risk over which it retains control.
Examples of retained risk might include:
— changes in scope of the project;
— indemnities for specific issues such
as existing asset conditions.
Globally PPPs can vary substantially within
these broad features and even within the UK a wide variety of
structures can be observed.
As previously submitted to this committee, London
TravelWatch supports the objective of the London Underground PPP
to guarantee the flow of investment into the Underground, after
many years of inconsistency and fluctuation. We consider it of
the utmost importance that the periodic reviews at 7.5 year intervals
should not be allowed to become vehicles for under-funded price
rises and for the scope of investment plans to be cancelled or
reduced in scope. This concern is given added importance by the
slippage that has occurred in parts of the investment schedule,
and by Metronet going into administration, each of which phenomena
increases the opportunity for cuts to be made in previously agreed
investment programmes.
We were initially concerned that animosity to
the principle of the PPP would adversely affect relationships
between London Underground (LU) and the PPP contractors. We are
therefore encouraged by the determination of LU's top management
to work constructively for the success of the PPP in the interests
of Underground users, whatever may have been the political debate
over its introduction.
We are, however, concerned that—despite
assurances that the Infrastructure Companies (Tube Lines and Metronet)
would get on top of the problems, once the period of climbing
the "learning curve" had passed—placing contracts
for looking after 70% of the LU network with a single organisation
was too much. Tube Lines, with only 30% of the business, has shown
itself to be more capable of delivering projects on time and to
budget, although its slowness to rise to the challenge of improving
performance on the Northern line has been disappointing.
However, we are now somewhat alarmed by the
increasing number of weekend engineering possessions being required
on the Jubilee line in recent months, and about how the upgrade
of the Piccadilly line will take place particularly on the central
London section of route. We submitted evidence to the London Assembly
Transport Committee scrutiny of this issue and this we attach
as appendix A to this submission. We believe that whilst passengers
are willing to accept some measure of "pain", provided
that they are informed about alterations to their services well
in advance and can plan accordingly, when these are then supplemented
by short notice additional closures for example, passengers' patience
can be severely tested. This is particularly important when passengers
may be making leisure journeys (say to the O2 arena) or to places
of employment which require attendance at weekends.
4. Lessons learned from the collapse of Metronet
and progress of the upgrade work subsequently?
As we highlighted in previous submissions the
structure of the Metronet PPP and its modes of operation were
complex and in many cases did not deliver value for money for
the taxpayer or the standard of service expected for the passenger.
We believe that in the case of Metronet, now under the control
of London Underground, there have been substantial changes in
working and accounting practices since the takeover of Metronet
that have produced substantial cost savings and increased overall
efficiency.
The structure of the Tube Lines PPP shares much in
common with the Metronet PPP, but the characteristics of the Tube
Lines are fundamentally different in respect of their supply chains.
The principal lessons of the Metronet collapse that are applicable
directly to Tube Lines are:
— a proactive management of PPP risk by
the public sector; and
— formal recourse to the PPP Arbiter in
assessing costs.
5. What contractual arrangements are appropriate
for the future?
London TravelWatch strongly advocates for the
contractual arrangements which balance the least disruption and
greatest benefits to passengers. In the shorter term changing
the contractual arrangements are likely to result in disruption
which would not be in the interests of passengers. In the longer
term consideration should be given as to whether PPP is the best
means to deliver infrastructure maintenance and enhancements to
London Underground's network. The collapse of Metronet has illustrated
the complexity and costs incurred when PPP structures are not
successful. It also illustrates that in reality it is challenging
to achieve genuine risk transferral.
As an example of the high costs of PPP/PFI projects,
the Intercity Express Project incurred £14.95 million of
consultancy fees[12]
up to March 2009. The complexity of the PPP/PFI structure and
the tendency to develop bespoke structures for each deal means
that the advisory costs to the public sector are high. These costs
have to be recovered by private sector efficiencies. The reality
of the efficiency gains are hard to establish given that the life
time of a typical PPP of 30 years.
6. What risks are associated with the PPP
arrangements with Tube Lines?
The principal risks associated with the PPP
arrangements with Tube Lines for passengers are programme overruns.
As an example London Underground informed London TravelWatch of
additional closures of the Jubilee Line on the weekend of 26 to
27 September and 3 to 4 October in order to allow Tube Lines more
engineering access to meet their programmed deadlines for the
Jubilee Line signalling upgrade. Line closures are disruptive
to passengers at the best of times, but the unplanned closures
were announced with minimal warning to passengers on 23 September
three days prior to the first altered closure date. It would also
appear from recent press statements that Tube Lines, despite additional
line closures, is unlikely to be able to deliver the Jubilee upgrade
on time.
There are also risks related to the continued disagreement
between London Underground and Tube Lines over the restated terms.
London TravelWatch urges both sides to come to an agreement over
the Tube Lines PPP programme that is in the interest of passengers.
This means ensuring that the full planned upgrades are carried
out on time and at a cost which means that passengers are not
penalised with higher fares.
7. What impact is the current economic situation
having on transport PPP and PFI schemes and what are the financial
implications for other transport schemes?
PPP/PFI is dependent on the availability of
credit to the private sector in order to raise debt to finance
projects. The impact of the current economic climate has been
to reduce the availability of credit and to decrease the appetite
for risk. Increased equity investment may also be required from
PPP bidders by commercial lenders. For upcoming transport PPP/PFI
deals in the UK transport market the consequences are to potentially
reduce the number of bidders as well to increase the cost of finance.
Bidders may also find it difficult to make definitive quotes for
costs which are dependent on sub-contracts or supply chains. The
result is that at the bid submission all bidders' offers are likely
to be higher over the whole life costing to cover that risk and
the cost of finance.
The UK is a mature PPP/PFI market with well established
legal and contractual structures. Transport is one of the most
long established sectors for PPP/PFI in the UK with historically
the largest cumulative volume of deals. However, many of the factors
effecting PPP/PFI are global because of the debt finance requirements
and also because many of the bidders are global companies.
The Treasury has set up the Treasury Infrastructure
Finance Unit (TIFU) in an attempt to provide liquidity to this
market both for upcoming projects and for existing providers.
In the Treasury's view, "it is unlikely that private sector
lending will be sufficient to deliver the scheduled pipeline of
projects even taking account of increased lending activity by
the EIB."[13]
This action by the Treasury may address the immediate issue as
a last resort, but the involvement of the Treasury in providing
debt finance calls into question part of the logic of private
sector involvement in public sector procurement.
Historically Transport has made up the largest
element of the PPP/PFI market in the UK. However, the volume of
transport PPP/PFIs have reduced substantially and no deals took
place in 2008. Of the current transport projects in procurement,
the Intercity Express Project and Thameslink Rolling Stock Project
both involve providing financing for the rolling stock to be procured.
They are therefore considerably impacted by the economic conditions.
It is notable that of a number of recent transport procurement
projects (not all PPP/PFI related) that either planned bid submission
dates have been delayed or bidders have been invited to revise
certain assumptions. This suggests that the public sector is likely
to have to shoulder a greater portion of the risk of PPP/PFI projects.
Bidders' are likely to ask for greater guarantees and conditions
which would reduce the overall risk transfer to the PPP provider.
The value for money that is achieved by the public sector from
PPP/PFI is therefore also likely to be reduced. This could lead
to either greater cost to tax payers and the travelling public,
or to a more limited scope of investment.
8. What role has the Government played in
these matters?
Given the contractual structure between TfL
and the Infrastructure Companies the direct involvement of the
Government has not been significant. This is because the DfT had
no direct controls over the risks associated with the PPP. The
NAO report into Metronet identifies this key issue.
In the demise of Metronet, TfL has been left in the
position of control over Metronet's former activities. The fixed
grant settlement for TfL has not been revised in order to address
this funding requirement going forwards. London TravelWatch urges
Central Government to reconsider this position in order that passengers
are not affected by:
1. cost savings in the investment programme;
and
2. a rise in fares in order to recover additional
expenditure costs.
9. CONCLUSIONS
London TravelWatch believes that the scale of
the London Underground PPPs meant that they were always a challenging
prospect to deliver. Whatever the rights or wrongs of the way
in which it was carried out, it has attempted to tackle the historic
problem that has faced London Underground and its passengers—namely
the need for long term commitment to fund investment in the system.
In common with other infrastructure operators LU's previous funding
regime had been hampered by a stop-start cycle of capital funding
governed by the fiscal requirements of the Government of the day.
London's transport users would be seriously disadvantaged
if either the costs to LU of taking over the Metronet upgrade
programme, or the current issues with Tube Lines restated terms,
were to put in jeopardy the commitment to continuing investment
that the PPP has sought to guarantee. We therefore urge that the
interests of passengers are held as paramount in resolving the
issues surrounding the restated terms and TfL's wider funding.
From the collapse of Metronet, there are lessons
that can be learnt about the performance of the PPP which could
lead to benefits for passengers, and we await the Select Committee's
conclusions with interest.
October 2009
11 Appendix A has not been reproduced as already in
public domain. Back
12
Page 43, Modern Railways, August 2009. Back
13
http://www.hm-treasury.gov.uk/d/ppp_tifu_letter_050509.pdf Back
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