4.9 The contracts, as negotiated, provide for a long term strategy for maintenance and renewal of the Tube infrastructure but London Underground, in the form of LUL, has a vital ongoing role to play as operator, well-informed partner and a guardian of the public interest:
■ As operator, LUL has overall responsibility for the statutory safety regime approved by the Health and Safety Executive.
■ London Underground's plans to monitor the Infracos' maintenance of assets were prepared and in place at the date of contract award and supported by an LUL 'obligations database'.
■ LUL has rights to obtain the information that it requires to assess performance on asset maintenance, renewal and upgrades15. In preparation for taking over the Tube operations, Transport for London also commissioned Parsons Brinkerhoff to develop an approach to track 'earned value' as a supplement to the planned approach.
■ London Underground made the contracts subject to an undertaking on protection of certain employment terms and, following representations from the trade unions, no compulsory redundancies without alternative job offers. From the outset, the GLA Act had included provisions protecting pension rights.
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| Low performance/delayed upgrade scenario loan cover ratios | |||||||
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| Covenant Default | Tube Lines Bid | High combined Scenario | Low Combined Scenario | |||
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| Min Loan Life Cover Ratio (LLCR) | 1.15 | 1.32 | 1.34 | 1.29 | |||
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| Avg. Loan Life Cover Ratio (LLCR) | 1.15 | 1.33 | 1.34 | 1.30 | |||
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| Min Debt Service Cover Ratio (DSCR) | 1.10 | 1.13 | 1.24 | 0.79 | |||
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| Avg. Debt Service Cover Ratio (DSCR) | 1.10 | 1.29 | 1.40 | 1.18 | |||
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| Cash flows (£million nominal pre-tax) for 7½ years | N/A | 920 | 987 | 846 | |||
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| NOTE 1 All Tube Lines debt ratios for the first 7½ years. Adjusting the ratio calculation to exclude debt that carries equity risk, for the remaining senior debt, the Debt Service Cover Ratio falls to a minimum of 0.95, still below the covenants. Source: Consultants to the National Audit Office | |||||||
4.10 One of Transport for London's major concerns was over the absence of arrangements for voluntary termination on a no fault basis, which is usually found in PFI contracts. Ernst & Young in their report echoed this concern because the provision enforces a duty on the PFI contractor to mitigate costs in such an event.16 We find that the PPP's pervasive requirement for 'economic & efficient' behaviour captures the duty to mitigate costs, but the absence of pre-agreed contract provisions leaves considerable room for argument. The Department told us that based on discussions with London Underground and their advisers, and given the political climate in which the deals were negotiated, the omission of a right for the public sector to terminate for convenience was a considered decision. This aimed to prevent the market from adding a premium to their pricing to reflect greater political uncertainty, even if voluntary termination had, as Transport for London proposed, required the prior consent of the Government. Transport for London told us that this surprises it because it had understood the grounds to be those included by London Underground its Final Assessment Report of 7 February 2002 which said:
"TfL regard the PPP as experimental and untested and believe, therefore, that it should be capable of being terminated, without an Infraco default, if this were judged to be in the public interest. This could be determined, for example, by the Secretary of State. They have said that it would be 'reckless' of LUL not to provide such a right. London Underground did not originally propose such a right because it is vital, in London Underground's view, to ensure that Infracos take a genuine 30-year view of their obligations in order to achieve the object of proper whole life asset management. Anything which might make the Infracos believe that the contract might terminate early, even if they were performing adequately, would compromise this. Nor is it easy to see why LUL would need such a right in circumstances where Infraco were meeting all its obligations, and where changes to the contract could be made through the existing periodic review mechanism to deal with any amendments LUL thought desirable. However, given the strength of Mr Kiley's view, LUL discussed with bidders whether they would accept including such a provision. They said that it was fundamental to their assessment of the transaction that they should only be exposed to the risk of termination if they were in default, and that a unilateral right to terminate by LUL would be unacceptable, even if it required the consent of the Secretary of State. LUL therefore decided not to introduce a right of public interest termination; it considers this a reasoned judgement which cannot be characterised as reckless."
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15 HC 644 "London Underground: Are the PPPs likely to work successfully" examines LUL's rights to information at an early stage in PPP operations.