Memorandum from Transport for London (TfL)
(UPP 06)
1. INTRODUCTION
1.1 Transport for London (TfL) welcomes
the opportunity to comment on the Committee's update inquiry into
the London Underground Public Private Partnership (PPP). Our response
provides an update on performance of the PPP and significant developments
since the submission of TfL's evidence to the Committee's previous
inquiry in 2007.
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 serves 270 stations and operates services
on 11 lines. Up to four million passenger journeys are made on
the network on the busiest days.
2.2 Metronet was previously responsible for the
maintenance and upgrading of eight of LU's 11 lines under two
of the original three PPP contracts, for the BCV (Bakerloo, Central,
Victoria, and Waterloo & City lines) and SSL ("sub-surface"
or Circle, District, Hammersmith & City and Metropolitan lines)
infracos. After Metronet collapsed and entered PPP Administration
in July 2007, TfL emerged as the only bidder for the two Metronet
companies, and they transferred to TfL ownership in May 2008.
Subsequently all former Metronet staff transferred to LU in December
2008. An organisational review of central support functions across
LU, designed to eliminate duplication and deliver the most efficient
structure, was then carried out, and a new integrated LU structure
was put in place with around 1,000 jobs removed.
2.3 Tube Lines remains responsible for the
maintenance and upgrading of the JNP (Jubilee, Northern and Piccadilly)
lines under its PPP Contract. The first Periodic Review of this
contract is currently in progress (see section 4 below).
2.4 2008-09 was LU's best ever year in terms
of operational performance and customer satisfaction ratings,
despite also carrying more passengers than ever before—nearly
1.1 billion during the year, almost as many as the entire National
Rail network. A table summarising operational performance in the
past six years is at Appendix 1.
2.5 The current economic downturn has since
led to a reduction in ridership (around 5-6% so far this financial
year) which has had an impact on LU's revenue. Overall, however,
passenger numbers still remain higher than they were five years
ago and demand is forecast to continue to grow by around 25% over
the next 10 years or so. Delivery of the current investment programme,
the largest seen on the Tube in decades, therefore remains essential,
in order to deliver the capacity and reliability improvements
needed to accommodate this growth. The line upgrades that are
at the core of this investment programme will deliver approximately
30% more peak capacity by 2020.
2.6 Given the constraints on funding that
have resulted from reduced revenue and the financial legacy of
Metronet (see section 3) it is also imperative that this investment
is delivered efficiently and economically, providing fare payers
and tax payers with the best possible value for money.
3. THE COLLAPSE
OF METRONET
3.1 TfL's submission to the Committee's
previous inquiry was made while Metronet was still in Administration,
but even at that time it was possible to identify the root causes
of its failure, which were a fatal flaw in Metronet's structure
and its contracting strategy, which committed it to using its
own shareholder companies.
3.2 The National Audit Office (NAO) report on
the failure of Metronet, published in June 2009, confirmed TfL's
long held view that Metronet's failure was the result of the failure
of its management team and shareholders to properly plan, manage
and execute its work. The NAO report also noted that Metronet
was effectively managed by LU once it entered administration.
3.3 Since Metronet transferred to TfL and
was integrated into LU, maintenance performance has improved and
good progress has been made with the two major line upgrades currently
in progress on the ex-Metronet lines—the Victoria line upgrade
(VLU) and the upgrade of the sub-surface lines (SSL upgrade).
3.4 On the BCV lines in 2008-09, overall
Availability—the key measure of day to day asset
reliability under the PPP contracts—was 27% better than
the contractual benchmark, with a 30% reduction in the total number
of Lost Customer Hours (LCH)[17]
compared to 2007-08. Further evidence of the turnaround in BCV
performance since the administration is a 21% decline in the average
number of LCH per period.
3.5 On the SSL lines in 2008-09, overall
Availability was 35% better than the contractual benchmark
and 36% better than in 2003-04. Under LU's stewardship the SSL
has continued the positive trend that started in 2006-07, with
a 16% reduction in LCH since 2007-08. The average number of Lost
Customer Hours per period was also 18% fewer post-administration.
An example of the improvement in the delivery of maintenance and
renewal works is that LU's recent delivery of ballasted track
renewal works on the District line has set new records for the
amount of track being replaced during a weekend possession—on
12-13 September 2009, 812 metres of track were replaced, more
than has ever been achieved before.
3.6 Additionally, both the VLU and the SSL
upgrade are progressing well—the first of the Victoria line's
new trains is now running in service, having done so for the first
time in July 2009, while the first of the new "S-stock"
air-conditioned trains for the sub surface lines is currently
in the final stages of testing at LU's test track at Old Dalby
and is due to be delivered to London in October 2009. LU has also
initiated the tender process for the vital new signalling system
on the sub-surface lines, adopting a fresh approach to the procurement
process that seeks to utilise the knowledge of the supply market
to deliver the best possible value for money. This will offer
savings of hundreds of millions of pounds compared to the contract
that previously existed prior to Metronet's collapse and which
was terminated prior to transfer to TfL.
3.7 LU has also had to deal with the financial
legacy of Metronet's collapse—the result of poor programme
management and system integration, ineffective cost control, a
lack of forward planning and inefficient fiscal management. Although
initial estimates from the NAO report put the loss to the taxpayer
of Metronet's failure at between £170 million and £410
million, this does not take into account work left undone by Metronet
which LU has addressed since transfer or which still needs to
be completed by LU in the future.
3.8 Through rigorous review of the Metronet
businesses, LU has been able, through renegotiation of contracts,
improved procurement, operational efficiencies and a revised work
programme, to remove approximately £2.5 billion of projected
costs from the budget to 2018, compared with the costs that Metronet
would have incurred.[18]
As part of this, LU is currently making further savings in maintenance
operations designed to deliver £60 million of efficiencies
per year, on top of the savings made as a result of the organisational
review mentioned in paragraph 2.2 above.
3.9 After Metronet exited from Administration,
TfL worked closely with the Government under the auspices of the
Joint Steering Committee (JSC) which was set up to examine and
make recommendations on options for a long term structure to deliver
Metronet's former contractual obligations. The JSC's report is
currently the subject of discussions between the Secretary of
State for Transport and the Mayor of London.
3.10 A more detailed analysis of all these
issues is contained in LU's PPP Report 2007-08 and PPP
& Performance Report 2008-09, both of which are available
on TfL's website at www.tfl.gov.uk/pppreport. LU remains committed
to regular and transparent reporting of performance and has recently
commenced publication, at the same website address, of a four-weekly
digest of performance data that complements the annual reports.
Other material is also presented publicly to the TfL Board.
4. TUBE LINES
AND PERIODIC
REVIEW
4.1 TfL's previous submission in 2007 noted
some of the achievements of Tube Lines' renewal programmes at
that time, and it has continued to show some success since then,
particularly in its stations programme which is on course to deliver,
by the end of the first contract period next year, modernisation
or refurbishment of all its stations as envisaged in the contract.
It has also showed more consistency in day to day maintenance
performance, and has turned around the performance of the Northern
line after early difficulties, although the intrusive upgrade
programme on the Jubilee line is reflected in a decline in Availability
scores on the line in the past two years.
4.2 It is, however, in the delivery of that upgrade
of the Jubilee line that Tube Lines faces its biggest challenge.
Currently, it is failing to meet that challenge. This is the first
of the major line upgrades, and will deliver a 33% increase in
capacity as a result of the installation of a new signalling system.
TfL has recently expressed its grave doubts about Tube Lines'
ability to deliver the upgrade by the contracted date of 31 December
2009. Tube Lines Chief Executive has also indicated that "we
don't think we will quite get there in December". At time
of writing, the outcome of the independent review of Tube Lines'
programme (which they agreed to undertake after being urged to
do so by LU) is urgently awaited, but it seems likely to indicate
not only that delivery will be delayed, but also that more weekend
closures will be needed.
4.3 Tube Lines' lack of progress is particularly
disappointing given the extent of closures that have been necessary—part
of the line has been closed on every weekend in 2009 and the number
of closures has been significantly more than the number originally
planned for at the start of Tube Lines' programme. These closures
are causing considerable disruption to passengers and to businesses
who depend upon the line.
4.4 The first Periodic Review of Tube Lines'
30 year contract is currently in progress. This will determine
the scope and the price of Tube Lines' work programme for the
second 7½ year contract period commencing in July 2010.
4.5 In 2008 LU requested initial Guidance
from the PPP Arbiter as to the likely cost of the works for the
second period based on the original PPP contract terms. The PPP
Arbiter's Guidance issued in September 2008 (and therefore in
2008 prices) estimated that the total funding required in the
second period should be in the range £5.1 billion to £5.5
billion compared with Tube Lines' estimate of £7.2 billion
and LU's estimate of £4.1 billion.
4.6 LU broadly accepted the PPP Arbiter's
Guidance and then, in finalising its Restated Contract Terms,
made a number of further adjustments to reduce the costs of the
second period whilst ensuring that the full upgrade programme
can be delivered. The re-stated terms did not therefore substantially
change the work to deliver major increases in capacity and reliability
through new trains and new signalling. However, projected costs
have been reduced significantly by LU by, for example, proposing
station refurbishment broadly every 10 years as opposed to the
seven and a half year cycle in the current contract. The restated
terms also reflected changes that had occurred in the economic
situation since the request for Guidance.
4.7 LU's revised evaluation of costs was
£4.2 billion. This is not directly comparable to the previous
valuation of £4.1 billion—it is coincidence that, after
the process of making revisions to scope, and other adjustments
as described above, these figures are similar.
4.8 LU issued its Restated Contract Terms
to Tube Lines in December 2008. Tube Lines responded to the restated
terms in June 2009 but its price was significantly in excess of
LU's evaluation and also still much higher than the price indicated
by the PPP Arbiter in his initial guidance last year, which Tube
Lines appears not to have taken into account.
4.9 Since receipt of Tube Lines' response,
LU and Tube Lines have made someprogress in determining the future
work programme and in reducing some costs accordingly. However,
Tube Lines' costs still remain unacceptably high in some areas
and LU therefore referred the issue to the PPP Arbiter on 23 September
2009, asking him to set a fair price for the works. LU intends
to continue its constructive discussions with Tube Lines, alongside
the PPP Arbiter process. It is anticipated that the Arbiter will
publish his draft conclusion on second period costs in December
2009.
4.10 Tube Lines has also produced an "alternative
proposal", outside of the Periodic Review process.
4.11 This alternative proposal, currently
only at a very outline stage, has been reported as offering a
price of around £4.3 billion. However, it is important to
make clear that this figure is not directly comparable to LU's
evaluation of £4.2 billion. Tube Lines' proposal excludes
some very significant elements of the work programme for the second
contract period, yet still remains above LU's view of the costs.
It also specifically removes the requirement for Tube Lines to
remain "economic and efficient" in that LU would become
liable for bearing the larger proportion of cost overruns on Tube
Lines' programme, however these were incurred. In effect the proposal
seeks to re-engineer the PPP structure which would create significant
legal and practical issues. Even if these could be resolved, such
fundamental changes would be likely to take significant time and
resource to implement.
4.12 Although LU will actively engage with
Tube Lines on this, and on any other proposals that may reduce
costs, LU's priority is to see that Tube Lines delivers all the
improvements it has promised on time, and that it offers a fair
price for the scope of works that LU has specified for the second
contract period, such that it delivers value for money for fare
payers and taxpayers.
5. CONCLUSIONS
5.1 Metronet's failure was largely the result
of its own inefficiency rather than a consequence of the PPP structure.
However, the legacy of Metronet's collapse, and the improved performance
delivered since its activities were integrated into LU, has inevitably
raised questions about whether an alternative model may be more
effective at delivering the improvements and, crucially, may offer
greater efficiency and value for money than the PPP was able to
deliver.
5.2 As the one remaining PPP contractor, it is
on Tube Lines' shoulders that the case for the PPP model now rests.
If the case is to be made, then Tube Lines must resolve the delays
to the Jubilee line upgrade and complete that work promptly; and
deliver a proposition with costs that offer value for money for
the second contract period.
5.3 TfL's objectives in relation to the
former Metronet activities now under LU's control are reliable
day-to-day performance and efficient delivery of the upgrade works,
in order that the service and future capacity that London depends
upon is achieved for the best possible value for money. LU has
so far demonstrated it has the capability to achieve that, and
it is committed to continue to ensure that its activities are
transparent and open to scrutiny so that its ongoing performance
in this respect can be assessed.
APPENDIX 1
LU OPERATIONAL PERFORMANCE 2008-09
| | 2008-09 |
2007-08 | 2006-07 | 2005-06
| 2004-05 | 2003-04 |
| Passenger journeys | millions
| 1,089 | 1,073 | 1,014
| 971 | 976 | 948
|
| Kilometres operated | millions
| 70.6 | 70.5 | 69.8
| 68.8 | 69.4 | 67.7
|
| Percentage of schedule | % |
96.4 | 94.8 | 94.5
| 93.6 | 95.3 | 93.1
|
| Excess journey time | minutes
| 6.6 | 7.8 | 8.1
| 7.5 | 7.2 | 7.4
|
| Customer satisfaction | score
| 79 | 77 | 76 |
78 | 78 | 76 |
October 2009
|
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http://www.tfl.gov.uk/assets/downloads/corporate/Item08-_Metronet-Integration-Budget-Implications.pdf
17
Lost Customer Hours (LCH): The total additional journey time measured
in hours, applying Nominal Accumulated Customer Hours (NACHS),
experienced by Customers using the Underground Network as a result
of Service Disruptions. Back
18
More detail is available in the report considered by the TfL Board
on 24 June 2009, and published on the TfL website at Back
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