Memorandum from Tube Lines (UPP 04)
OVERVIEW
1. Tube Lines is the infrastructure and
asset management company responsible for maintaining and upgrading
the Jubilee, Northern and Piccadilly lines, under a 30 year partnership
with London Underground, which commenced on 31 December 2002.
2. Tube Lines consistently learns from its experience
of running the PPP Agreement that it has with London Underground
(the "PPP Agreement"), as well as the broader experience
of its members, and has where possible learnt the lessons arising
from the Metronet collapse. That approach, and its particular
structure and expertise, has enabled Tube Lines to carry out its
obligations under the PPP Agreement in an economic and efficient
manner, delivering improved safety and substantial enhancements
to the efficiency and effectiveness of the lines for which it
is responsible. Although the PPP Agreement could be improved in
some respects, Tube Lines still considers that the PPP model is
a robust one that can deliver real benefits for passengers and
the taxpayer.
3. Tube Lines believes that the PPP would work
most effectively if there was greater recognition of the benefits
brought by the partnership element as originally envisaged in
the PPP. There is not always a clear understanding at all levels
of London Underground of how to get the best out of the PPP. Tube
Lines considers that this lack of understanding of the PPP arrangements
and consequent lack of a partnership approach has made the PPP
unnecessarily adversarial.
What lessons can be learned from the collapse
of the London Underground PPP Agreement with Metronet?
4. On 5 June 2009, the National Audit Office
published its report (the "NAO Report") on the failure
of Metronet. The NAO Report suggests that a number of factors
contributed to Metronet's failure.
5. The main cause identified in the NAO Report
was Metronet's poor corporate governance and leadership. Tube
Lines agrees with this assessment, which echoes the Transport
Select Committee's view that Metronet's structure "contributed
to the inefficiencies of Metronet" (p 7, TSC, 25 January
2008).
6. The other principal causes identified
in the NAO Report were as follows:
(a) many decisions had to be agreed unanimously
by Metronet's five shareholders;
(b) Metronet guaranteed subcontracts for capital
works to its shareholders, thereby creating a tied supply chain
and so preventing Metronet from being able to act economically
and efficiently;
(c) Metronet's executive and management changed
frequently and was unable to manage the work of its shareholder-dominated
supply chain effectively; and
(d) the poor quality of information available
to Metronet's management, particularly on the unit costs of the
station and track programmes, meant that Metronet was unable to
monitor costs or have work performed economically and efficiently.
7. Tube Lines agrees that a structure where
shareholders are tied suppliers cannot work. The NAO Report rightly
criticised a corporate arrangement where the shareholders "adopted
governance and management structures which gave power to the suppliers
rather than the management of the business" (p 8, NAO Report).
Future PPP arrangements with the characteristics of the PPP Agreement[14]
should be brokered with the Metronet example in mind, along with
the NAO Report's recommendation that "contracts should be
awarded to bodies which have clear leadership, a credible corporate
governance structure and an approach to securing suppliers which
can be demonstrated to be value for money" (p 8, NAO Report).
8. The NAO Report also identified a number
of issues specific to the PPP Agreement. These include the need
for accurate, up-to-date reporting, the need to involve the PPP
Arbiter more in the oversight of the whole upgrade programme,
and London Underground's attitude to partnership as demonstrated
by its working relationship with Metronet.
9. It is vital for the achievement of the
PPP Agreement's objectives that all those involved in it follow
clear, accurate, transparent, and relevant reporting procedures.
This does not mean that there should be an increase in bureaucratic
reporting, oversight, or control demands; rather, there should
be better quality and more appropriately targeted reporting. It
also means, as was recognised by the TSC, that there is a clear
need for a reporting process that is "neutral and is designed
to provide the information that both the Infracos and London Underground
require to address performance issues" (p 19, TSC).
10. The role of the PPP Arbiter needs to
be considered in light of the changes that have taken place within
the PPP Agreement. The NAO Report clearly recommends that "effective
independent scrutiny and evaluation of London Underground's management
of major infrastructure projects, on behalf of both [Transport
for London] and [the Department for Transport], could provide
greater assurance on value for money" (p 8, NAO Report).
The Arbiter could play a role in overseeing London Underground's
operation of the lines previously run by Metronet, which is now
the subject of no express scrutiny, as well as London Underground's
role in relation to the lines run by Tube Lines, in addition to
his current role.
11. We also agree with this Committee's
recommendation that the Arbiter should "[report on] the effectiveness
of London Underground as client during the modernisation of the
Tube network" (p 35, TSC). The environment created by the
PPP Agreement is unique, and requires extensive reporting and
administrative burdens, not imposed on other asset management
companies around the world. Tube Lines considers that the structure
of London Underground makes the operation of these reporting and
administrative burdens challenging. As was highlighted in the
NAO Report, "both Tube Lines and Metronet found that London
Underground's horizontal organisation, with several overlapping
authorities, led to a number of different approaches being required".
The NAO report refers to "90 individuals" identified
within London Underground "who held authority in the scope
approval process". The impact of this structure was then
exacerbated by London Underground's behaviour: Metronet contended
that London Underground's approach and behaviour contributed to
the difficulties it found itself in, blaming "cost overruns
on a wasteful approach to job specification by London Underground"
(p 20, TSC).
Are these lessons being applied to the London
Underground PPP Agreement with Tube Lines?
12. The lessons learned from the failure
of Metronet are, as far as possible, being borne in mind in terms
of the way in which Tube Lines operates. However, as set out below,
there are limitations on the extent to which changes as a result
of the lessons learned from Metronet are both required to be implemented
by Tube Lines, due to the fundamental differences between the
structure and characteristics of Metronet and Tube Lines, and
are able to be implemented, due to the constraints that Tube Lines
faces, as Metronet did, in relation to the nature of London Underground.
TUBE LINES'
CORPORATE STRUCTURE
AND PROCUREMENT
13. Tube Lines is not the same as Metronet.
Tube Lines was set up with a very different corporate structure
and, as such, its corporate governance structure and policies
ensure that it is not impeded by the inflexibility that affected
Metronet's day-to-day management or the impact that conflicts
of interest between Metronet's shareholders had on preventing
effective leadership. Unlike Metronet, Tube Lines has a number
of independent members on its board, who are not tied to the consortium
partners. This means that the board is able to, and does, make
decisions in the best interests of Tube Lines, as it is obliged
to do. Additionally, decisions by the board are required to be
passed by a simple majority, rather than unanimously, unless the
matter to which the decision relates was not included on the meeting
agenda or it is a matter reserved for consideration by Tube Lines
(Holding) Limited ("TLH"). Even where decisions are
required to be made by TLH, there are conflict of interest provisions
that effectively disenfranchise the shareholders in respect of
decisions in relation to contracts with affiliates of the shareholders.
14. Additionally, and by contrast to Metronet,
Tube Lines' lenders play an additional governance role in that
they ensure that Tube Lines' decision making on major issues is
conducted properly. In this sense they provide an additional check.
The Technical Adviser to the lenders is fully informed on all
relevant matters and takes an active role in this process.
15. Tube Lines' corporate structure also
ensures that the company's management has access to the information
that it needs in order to run Tube Lines in an efficient manner.
This is substantially because, while the Tube Lines Board retains
overall responsibility for the running of Tube Lines, it is assisted
by a number of committees, each made up of experts in the subject
for which that committee has responsibility. The Tube Lines' board
delegates to the committees the responsibility for conducting
internal reviews and analysis of specified matters in order that
they can then make recommendations to the Board. This structure
ensures that decisions are taken at the appropriate level, on
the basis of the necessary information, without the need for overly-onerous
procedures in relation to decision making and approvals.
16. By contrast to Metronet, [during the
course of the PPP Agreement, there has been a low turnover of
Board members: indeed, since the start of the PPP in January 2003,
Tube Lines has had a low turnover of board members and only two
CEOs and two Chairmen, which has enabled stable and consistent
management.
17. As emphasised in the NAO Report, there
is a distinction to be drawn between the Metronet tied supply
chain approach and Tube Lines' approach, which is described by
the report as a "shopping around approach based on procuring
goods and services through open competition". Tube Lines'
operating model relies on a combination of internal resources
and external subcontractors selected through competitive tendering
to deliver the obligations under the PPP Agreement. Tube Lines
has developed, and follows, a detailed procurement process to
be used when resources are not available internally, or where
to use such internal resources would not be the most appropriate
way to proceed. The procurement process ensures that Tube Lines
is able to establish and manage robust contractual relationships
which meet the requirements under the PPP Agreement and deliver
value for money.
18. As such, the lessons from Metronet's
failure that arise out of Metronet's corporate structure and procurement
arrangements do not need to be applied to the PPP Agreement with
Tube Lines because they are not relevant to it.
LESSONS TO
BE LEARNED
BY LONDON
UNDERGROUND
19. There are, however, other lessons from
Metronet's failure that, based on our experience to date, are
not being applied to the PPP Agreement but which should be. In
particular, these lessons relate to the administrative burden
created by, and the approach of, London Underground. Both of these
factors were highlighted by Metronet as significantly contributing
to the difficulties it faced and they continue to this day. Echoing
the experience of Metronet, Tube Lines has found that London Underground
continues to refuse to see the PPP Agreement for what it is; a
fixed price contract for a fixed scope of work, with no general
variation or change provision built into it. It remains the case
that the lessons that should have been taken from London Underground's
approach to the PPP agreement with Metronet have yet to be fully
taken on board.
20. London Underground has constantly sought
to depart from the contractual structure established under the
PPP Agreement. It has repeatedly sought changes to the scope and/or
manner in which the works are carried out and has repeatedly departed
from contractual procedures. In other words, the level of involvement
and interference by London Underground gives rise to considerable
additional time requirements and costs but it also undermines
progress towards achieving the upgrade of the Jubilee, Northern
and Piccadilly lines.
21. As was seen from Metronet's experience,
London Underground has sought to expand the scope of work agreed
in the PPP Agreement. It would appear that certain areas of London
Underground have not understood how the PPP arrangements should
work. Consequently they have repeatedly sought additional work
to be carried out that falls outside the scope of the project
and in some instances have made Tube Lines completion of tasks
conditional on our acceptance of these out of scope works. Some
examples of the approach taken by some parts of London Underground
to the PPP Agreement include:
(a) Requirements to change the "off the
shelf" signalling system for the Jubilee line by adding bespoke
elements unique to London Underground, led to a new bespoke system,
after the PPP Agreement had been signed. Instead of using the
proven "off the shelf" moving block system that is currently
being used in Hong Kong as well as on the DLR and elsewhere around
the world,, which had been selected in the original tendering
process, these requirements meant that Tube Lines had to have
the system significantly redesigned. This has resulted in a one-of-a-kind
system, untried and untested on other metros, being installed
on the Jubilee line. The introduction of new requirements has
resulted in substantial additional complexity and therefore substantial
additional work for the Jubilee and Northern line upgrades with
a consequential increase in the original time frame and an increase
in the costs.
(b) Regular use of the standards process by some
parts of London Underground to oblige Tube Lines to change, expand
or alter works being carried out. An example is the use of standards
to require Tube Lines to introduce features to improve mobility
within stations. Over a period of time, London Underground introduced,
changed and withdrew a number of standards and imposed requirements
for additional double and lower handrails on stairways, contrasting
stair treads highlighting and coloured bands on columns within
stations. Although it was clear that the requirements for these
features were in addition to the original scope of the work, London
Underground insisted that they were required. Tube Lines referred
the issue to an adjudicator who determined that Tube Lines was
entitled to additional payment for these features. However by
the time this decision was made significant time and resources
had been lost on this particular piece of work.
(c) Station supervisors regularly prevented Tube
Lines from gaining access to which they were entitled, resulting
in successful claims for over £12 million. They have also
made unreasonable demands in return for access. For example, Tube
Lines' workers were denied the use of the station's car park to
facilitate upgrade work being carried out at the station. The
station manager only agreed to the use of the car park on the
condition that Tube Lines provided:
(i)an air conditioning unit and blinds to his office;
(ii)new double gates to the main car park entrance;
and
(iii)two posts in the car part to prevent cars reversing
into the wall mounted air conditioning unit.
Since Tube Lines could not undertake the work
at the station without a place to receive delivery of materials
it had little choice but to give in to these out-of-scope demands.
22. These are just a few examples of approach
taken in parts of London Underground, which has not significantly
changed since the collapse of Metronet. This does not mean the
PPP Agreement cannot work; despite these instances, which do make
it more difficult for Tube Lines to meet its contractual obligations
on time and within budget, it is still delivering its commitments
at a lower cost than Metronet (see attached tables).
How has the upgrade work progressed since the
demise of Metronet?
23. Since the demise of Metronet, Tube Lines
has continued to make significant progress on upgrade work, such
as track refurbishment, station refurbishment, escalators, lifts,
signalling, train performance and fleet reliability. However,
London Underground has repeatedly required Tube Lines to carry
out additional upgrade work beyond the scope of the PPP Agreement,
prevented Tube Lines from carrying out works according to its
plans, and hindered Tube Lines from executing the delivery of
work which it is contractually obliged to do. Tube Lines believes
that there are a number of London Underground issues in terms
of their role which are detrimental in relation to upgrade work,
including their approach to granting necessary closures, their
requirement for bespoke software system features, and the difficulties
encountered by Tube Lines in working with London Underground operational
and assurance procedures, all of which have significantly extended
the time that projects take, as well as the costs involved.
ACHIEVEMENTS TO
DATE
24. Since the start of the PPP Agreement,
Tube Lines has completed the upgrade and refurbishment of 72 of
the 96 stations along the Jubilee, Northern and Piccadilly lines
it is responsible for under the PPP Agreement. 13 stations are
currently being worked on with work on the remaining 11 due to
start later this year. Tube Lines has completed 76 lift and escalator
refurbishments across the three lines. Seven refurbishments have
been done on the Jubilee line. 31 have been completed on the Northern
line and 15 on the Piccadilly line. A further 23 have been undertaken
at three stations which straddle more than one of the three lines.
Step-free access work has been completed at nine stations and
is currently underway at a further four stations. During this
time Tube Lines has been able to further improve its safety injury
rate from 1.40 in 2003 to 0.04 in 2009.
25. These achievements also, however, involved
material additional expense as a result of London Underground's
having increased the scope of the works that it required and changing
the way in which it required Tube Lines to carry out the work,
in spite of the fact that the PPP Agreement contained a fixed
scope of works albeit one that was loosely defined, thereby allowing
London Underground to add additional requirements, at a cost,
once it had been agreed. In addition, London Underground hindered
Tube Lines' ability to carry out the works required by the stations
programme by failing to comply with its own obligations under
the PPP Agreement.
26. Despite the Northern Line being in a
worse state than anticipated at transfer, Tube Lines has replaced
track, upgraded stations and signalling, used predictive maintenance
techniques, improved train management systems and overhauled train
doors. These changes have resulted in a 49% reduction in delays
caused by infrastructure, a 10% increase in customer satisfaction
levels and enabled the line to operate 98% of its 12 million scheduled
kilometres annually as opposed to less than 90% when the line
was at its worst. London Underground worked closely with Tube
Lines on this improvement, in particular, implementing improvements
to the timetable. This is a really good example of what can be
achieved when both parties work in partnership as the PPP Contract
envisaged.
27. Since the demise of Metronet, Tube Lines
has continue to focus its efforts on delivering its work on time
and within budget, with a particular emphasis on completing the
Jubilee line upgrade and leveraging the experience gained on that
project to start the Northern line upgrade. Significant progress
has been made on the Jubilee line. Although Tube Lines will now
not meet the 31 December 2009 deadline to deliver the project,
the level of progress that has been achieved to date is such that
the overrun in the project will be limited in time and the costs
of any delay will be carried by Tube Lines and not passed to the
taxpayer.
28. The upgrade work on the Jubilee line
has been carefully planned with a need for it to be carried out
in a particular order over the life of the project. To facilitate
this Tube Lines has asked for a total of 118 partial or whole
line closures since 2002. Although Tube Lines was granted 113
closures, only half of these were at the times and locations we
asked for and needed to carry out the work according to plan.
While it was possible to undertake work during the closures we
were given, it was not possible to do the work according to the
long-term plan with the resulting need to reorganise, reschedule
and review at short notice, which has not allowed us work as efficiently
or effectively as we can.
29. It is difficult to tell how this upgrade
work compares to work being undertaken on the Metronet parts of
the network. While Tube Lines' reporting and information provision
(both to London Underground and to the Arbiter) on the projects
is clear, no comparable, independently-verified, evidence is available
showing the progress that London Underground is making on the
lines it now has responsibility for. Tube Lines considers that
such information should be made available.
30. Tube Lines' and its costs have been
independently benchmarked and are costs across the board have
been demonstrated to be between 20-50% less than Metronet's during
2008-09 when it was under the direct control of London Underground.
(charts are included as appendices).
What contractual arrangements are appropriate
for the future?
31. One of the primary purposes of a PPP
arrangement is the injection of private sector due diligence,
management and risk management. Treasury studies have shown that,
while there are inevitably some exceptions, such as Metronet,
the vast majority of such projects perform better than traditional
government procurement in terms of on-time and on-budget delivery.
In essence, the PPP model is a robust and flexible one, which,
when run effectively, continues to be an efficient approach to
delivering the much needed upgrade to the network.
32. Under the PPP Agreement, Tube Lines is obliged
to meet particular service output targets (including journey time
capability and service consistency and service control) and in
doing so upgrade and enhance the network to make sure that these
key targets are met. In order for the PPP Agreement to operate
as effectively as possible, it is also necessary for London Underground
to adopt an approach that is consistent with the scheme of the
PPP Agreement and its output-based nature under which Tube Lines'
obligations are based on output targets which give flexibility
for Tube Lines to determine the methods of achieving those targets,
subject only to overriding criteria governing safety. Such a scheme,
in combination with Tube Lines' structure of independent management
and no tied supply chain, gives rise to the economic and efficient
day-to-day performance of the company.
33. The NAO report clearly states that Tube
Lines' project management has delivered results. Appendix Five,
section C. which compares Metronet and Tube Lines' differing approaches
to addressing problems clearly shows that Tube Lines' strong stand
enforcing its interpretation of the contract and its proactive
approach to project management and to reducing the complexity
of its own organisation, has improved efficiency and output and
resulted in an operation that it is better placed to deliver results.
This Committee also recognised this fact, stating that Tube Lines
"provides an example of private sector innovation and efficiency".
34. While the PPP Agreement is not perfect,
Tube Lines' delivery under it demonstrates that it can offer an
example of a contractual arrangement that can deliver what is
contractually required on time, to budget and to the quality levels
one would expect if given real and meaningful support by London
Underground.
35. Tube Lines believes that an alternative
model for the management of risk is possible which would benefit
all parties including London Underground and the taxpayer and
it has, therefore proposed an alternative approach to the PPP
Arbiter and to London Underground.
What risks, if any, are associated with the PPP
Agreement with Tube Lines?
36. We believe that the PPP agreement is
robust and is delivering a good value service for London. This
is because of a robust corporate governance structure and management
of risk. Greater acceptance of the structure of the PPP and wider
take adoption of the approach taken on the Northern line would
only enhance this.
What impact is the current economic situation
having on transport PPP and PFI schemes and what are the financial
implications for other transport schemes?
37. Current financial market conditions have
deteriorated significantly since the summer of 2007. There are
few transactions that have closed in the last year that can be
considered appropriate for comparative purposes. However, financing
costs even for simpler and smaller PPP projects than represented
by Tube Lines are significantly higher than the levels that applied
at the time of either Tube Lines' initial financing in 2002 or
its refinancing in 2004.
38. In the current financial market, the complexity
that was introduced in the 2004 refinancing, combined with the
general complexity of the PPP Agreement itself, would result in
a "complexity premium" as it would be likely to deter
investors who would not be willing to spend the time required
to understand the project and the financing structure.
39. Therefore, any financing raised in the
current market would be likely to be substantially more expensive
than the existing financing that Tube Lines has in place.
October 2009
BENCHMARKED COST COMPARISON CHARTS TUBE LINES
AND METRONET 2008-09
14 There are numerous "PFI model DBFO"
PPPs for (say) a single site hospital project, where the fixed
supply chain model works very well. Back
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