Executive summary
1 On 7 February 2002 the then Secretary of State for Transport announced approval of a decision by the board of London Regional Transport to enter into three Public Private Partnerships (PPPs) for the infrastructure of the London Underground system (the Tube). The operation of the trains would remain a public sector responsibility of London Underground Limited (LUL), together with responsibility for managing the PPPs themselves. In July 2003 LUL was transferred to Transport for London which was set up in July 2000 and reports to the London Mayor.
2 By approving the PPPs, the Government intended to establish long term arrangements for the private sector to carry out a major programme of improvements to the Tube infrastructure. London Underground evaluated the net present value1 of spending under the three PPPs over 30 years at £15,700 million (with a value of £9,700 million over the first 7½ years). The public sector would make service charge payments subject to the private sector partners, Tube Lines and Metronet (see Figure 1), delivering specified contract outputs.
3 The resulting deal structure is unique, complex and contains a number of novel features. These include an output-based performance and payment regime. There is also a built-in periodic review mechanism to enable the parties to re-specify requirements within the PPP scope and re-price the deals every 7½ years. And an Arbiter has been established who can be called on to decide on the price, including financing costs, that an economic and efficient supplier in similar circumstances could charge.
4 This report examines whether these PPP deals are likely to give good value for money, taking into account the Government's objectives. It concludes that:
a The complexity of the deals resulted from the scale of the work required to modernise the Tube, the decision to have innovative output-based contracts and limited knowledge of the condition of the less accessible infrastructure.
b There is only limited assurance that the price that would be paid to the private sector is reasonable. The terms of the deals changed markedly during prolonged negotiations with the eventual winning bidders. Periodic review at the 7½ year breakpoints leaves some uncertainty about what the price eventually will be - but given the uncertain condition of some assets, greater price certainty would have resulted in bigger contingency provisions and a higher price. Revisions to the price have to meet tests of economy and efficiency for the rate of return to be unchanged.
c The process of negotiating the deals, and obtaining consents (including state aid clearance), was costly for all the parties involved. Extra time and costs were incurred as a result of partially rebidding contracts on two occasions before the selection of preferred bidders, and - the Department for Transport believes - as a result of the legal challenges from Transport for London although Transport for London disagree. The public sector (comprising the Department for Transport, London Regional Transport and London Underground Limited) spent some £180 million and the winners of the three bids a further £275 million. This £455 million equates to about 1½ per cent of the undiscounted 30 year deal value (2.8 per cent of the discounted deal value).
d Compared to London Underground's pre-1997 investment regime, the resulting deals offer an improved prospect, but not the certainty, that the infrastructure upgrade will be delivered. The work will start 2 years later than originally planned. Recovering the maintenance backlog will take 22 years rather than the 15 years originally intended, following the Department for Transport's decision to spread the scale of remedial work required, which proved greater than anticipated, over a longer period.
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1 The discount rate used by London Underground here and elsewhere, in line with the Treasury’s guidance, was 6%.