Memorandum from M. Blaiklock (UPP 08)
You may recall my appearance at your Committee
on February 27, 2002, as part of the Inquiry into the London Underground
PPP. It is interesting to recall the Minutes:
Para 35: (Mr Donohue) "Do you believe
that London Underground retains sufficient leverage at this seven
and a half year period for the review?"
(Mr Blaiklock) "I am not sure who
will have leverage. I think there will be a contractual mess."
Para 38: (Mr Donohue): "So do we
need a regulator?", viz The PPP arbiter
(Mr Blaiklock) "I am not sure. We
are into uncharted territory here because I do not know another
situation where you have this kind of possibility arising".
I, therefore, took great interest when the PPP
Arbiter, Chris Bolt, was interviewed by your Committee on 6 January
2010.
Two comments:
Q170.: (Mr Wilshire) "I want to go back
to the point Mr Stringer raised but get there via a general question
first, if I may. Do you consider that it in the interests of passengers
and the taxpayer that Tube Lines survives or is it in their interests
that it finishes?"
Mr Bolt: "My view very clearly is
that it is in the interests of taxpayers and users of the Tube
that Tube Lines does survive because the ability to compare performance
is a very powerful spur to improvement".
Had it occurred to the Committee that, without
Tube Lines, there would be no need for there to be a PPP Arbiter,
and so there would be a saving to the Taxpayer?
The cost of the PPP Arbiter's Office in 2008-09
was £3.5 million (ref. PPP Arbiter accounts, www.ppparbiter.org.uk).
Mr Bolt had an undeclared conflict of interest in answering this
question!
(b) When Tube Lines originally was awarded the
PPP contract end-2002, the funding comprised:
| | Amount (mn)
| Terms |
| Equity | £135 |
|
| Sub-Debt (Shareholder loan) | £135
| 27 years @ 15% interest |
| Bond | £630 | 18-25 years @ 1.45-1.65% over LIBOR
|
| Bond (AMBAC) | £600 |
18-25 years @ 0.5-1.0% over LIBOR |
| EIB | £300 | 25 years @ 0.25% over LIBOR
|
| Standby loan | £200 |
|
| Misc facilities | £77 |
|
| Total Debt | £1,800 |
|
| Total | £2,150 |
|
(Sources: S and P; Euromoney "Project Finance".)
| | |
Since that time the finances of Tube Lines have been re-financed
(a few times!), such that as of end-2008 the loans outstanding
comprised:
| Loan | Amount (mn)
| Terms |
| EIB Loan | £269.9
| Interest = 5.36% pa |
| Term A Loan | £1,065.6
| Interest = 5.54% pa |
| Term B Loan | £75.5 |
Interest = 7.45% pa |
| Term C Loan | £119.7 |
Interest = 8.68% pa to 2010, then LIBOR plus 7%
|
| Term D Loan | £17.9 |
Interest = 1.17% pa to 2010, then LIBOR plus 9.5%
|
| Unsecured Loan | £90.0
| Interest = 16% pa to 2025 |
(ref: Tube Lines Limited Accounts 2008.)
| | |
The 2008 Accounts also show that Corporation Tax was £17.1
million on a turnover of £806 million. and no Dividends were
paid for that year. Under the PPP Concession dividends were not
allowable during the first (7 year) review period. "Secondment
service fees" to Bechtel and Ferrovial companies (ie the
shareholders) amounting to £26 million were also paid in
2008 (ref Note 31).
From the above one concludes that:
(a) Tube Lines was quite highly geared (ie 85% debt and 15%
equity). Lenders must have perceived the borrower as "low
risk";
(b) at least half of the Tube Lines equity was injected as
shareholder loans at an inflated interest rate. This provides
a mechanism for the shareholders to extract, in effect, dividends
before corporation tax is applied;
(c) using this mechanism, it is likely that over the last
seven years Tube Lines shareholders will have been able to extract
"dividends" in the order of their original equity investment;
(d) given that the shareholders are non-UK entities, it is
quite probable that no UK tax would be payable on such investment
income or capital gain; and
(e) significant amounts may also have been extracted from
the Company by shareholders via service fees, enhancing shareholders'
return on investment. This mechanism is similar to that which
arose with Metronet!
As a result, the residual financial risk to Tube Lines' shareholders
in current circumstances could well be minimal and, if the Tube
Lines franchise collapsed, the shareholders will have lost little,
if anything. One therefore questions what financial risks, if
any, Tube Lines will actually assume if the status quo
prevails and they continue to operate the JNP PPP Concession over
the next review period.
January 2010
|
