3.3 London Underground, in April 1998, had to assess and then overcome its own skill deficiencies by appointing external advisers. Realising that in some areas teams of advisers would be necessary to support the procurement, London Underground decided to embed key individual financial, legal and project management advisers into senior positions in the project team.
3.4 London Underground appointed its advisers following competition. The key legal and financial advisers were Freshfields and PricewaterhouseCoopers respectively; both were appointed in May 1998. Bid submissions came from nine potential legal advisers and six potential financial advisers. In both competitions, London Underground secured competitive fee rates. Freshfields agreed an average hourly rate for all qualified lawyers, irrespective of seniority. During the procurement, the firm found that more partner time was required on an ongoing basis than it had estimated when calculating its blended rate. After a period absorbing extra costs, the Freshfields contract was renegotiated in 2001 at rates closer to its standard commercial billing rates. PricewaterhouseCoopers was paid on the basis of hourly rates, but agreed to cap the chargeable time and in practice worked hours that frequently exceeded the time that they could charge.
3.5 In the run up to financial close for the deal with Tube Lines, London Underground became aware that lenders' structural exposure to risk, and corresponding market pricing uncertainty, had been lessened by the increase in the underpinned amount (see para 2.36). The financing terms underpinning the Tube Lines deal were therefore capable of improvement, increasing the potential financial benefits from an early or larger refinancing. This led to negotiations between commercial agreement and achieving final contracts including finance. The public sector share could perhaps have been improved if, in anticipation of the Tube Lines structure, which earlier analysis had identified as a possibility, London Underground could have negotiated more favourable refinancing terms before the commercial agreement in May 2002. When developing a programme to manage interest rate risk, PricewaterhouseCoopers brought in specialist capital markets advice from leading financial institutions in a timely manner. The approach was endorsed by Partnerships UK and achieved a satisfactory outcome (see paragraphs 2.33 and 2.34).
3.6 To avoid duplication of advice and reduce expenditure on advisers, the Department agreed with London Underground that the latter would share the advice it received. When the Department considered that independent scrutiny of London Underground's activities was prudent, for example analysing forecasts and reviewing assumptions in key documents, it engaged its own advisers; principal among them was Ernst & Young.8
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8 The Department estimated at £2 million since 1998-99.