Whether Transport for London had provided advice to the Department of Transport concerning TfL's recommendations for a public bond financing to support required capital investment in the Tube?
In fact, beginning in late 2000 TfL had provided its views and detailed recommendations to LUL and DETR/DfT concerning what TfL believed to be a cost effective alternative to the PPP financing scheme. Although some material was formally submitted only to LUL, at all relevant times LUL was acting under the direction of DETR/DfT through London Transport. This record is summarized below, and includes the following attachments:14
- Outline of a Programme for the Rehabilitation and Management of the London Underground; 13 December 2000. Transport for London, available via the Web at http://www.tfl.gov.uk/tfl/pdfdocs/report02.pdf.
This piece outlines the use of securitisation, a form of public borrowing, to provide the bulk of the financing to support an alternative approach to the refurbishment of the London Underground. The paper also addresses the in-depth involvement with the private sector, the management of risk between public and private sectors, the need for a full assessment of asset conditions, and the likely levels of Government support required for such a programme.
While the report was not addressed to DETR, it was provided to DETR and made broadly available to the public. As the next document attests, it was considered in detail by DETR.
- Response to Questions Raised by DETR Concerning TfL's Outline of a Programme for the Rehabilitation and Management of the London Underground; 29 December 2000. Confidential correspondence from Robert R. Kiley to Mike Fuhr, Director, London Underground Task Group.
Regarding TfL's plan of 13 December, DETR tabled various questions on strategic and technical points raised by the paper. The note therefore was direct correspondence from TfL to DETR.
This paper re-emphasised the role the private sector would play in a TfL plan, the controls that the public sector would require, and the specifics of the proposed financing plan and risk allocation by TfL.
- London Underground Public Private Partnership, Emerging Findings; 17 July 2001. Deloitte & Touche Corporation. Executive summary available via the Web at http://www.tfl.gov.uk/tfl/ pdfdocs/report02.pdf.
This report examines a TfL bond plan for works within the Public Sector Comparator with regard to the value for money analysis of the BCV and JNP Infracos. The report notes that the value of public sector bond financing has been largely dismissed by LUL's application of a concept termed "reputational externality". Also, net financing costs for the public alternative were inflated by an inefficient treasury management plan, which raised and held for five years large cash balances from bonds, despite substantially lower investment rates than borrowing costs. Deloittes notes that these costs could be significantly reduced by standard treasury management techniques. In LUL's analysis of VfM, supporting its decision to proceed with preferred bidders, its presentation of these two factors disadvantaged a viable public bond case by £900 million. See paragraphs 3.7.2 and 3.7.3.
The Deloitte report also notes that selection of preferred bidders too early in the process could lead to a materially adverse impact on VfM. Independent of the benefit of public financing and highly material adjustments to the PSC, the 7.5year bid for the JNP line did not show value for money and the BCV bids show that there was a scenario where the PSC offers better VfM than the preferred bid.
This report was shared by TfL with LUL's management.
- Interim Consultation Response to London Transport on PPP documents provided between 11 February 2002 and 15 March 2002; Chapter VI Value for Money; Transport for London. Available via the Web at http://www.tfl.gov.uk/tfl/report/pdf-05.pdf.
The chapter describes various criticisms of the value for money analysis, and describes that a TfL bond-funded alternative would project present value cash savings of £1.7 billion against mid-point estimates related to works undertaken in the first contractual period, or £1.2 billion against the highest estimates of the PSC (see page 44). Even when conceding for discussion LUL's questionable estimates of social costs that against the PSC, the savings of the PSC over the bids range from £1.1 billion (against its central estimates of public costs) to £500 million (against the 95% high end of estimated public costs). This chapter notes that TfL's bond plan has never been accurately represented during any stage in the evaluation of the PPP, despite the presentation variously to DfT and LUL of the above materials.
Also in the chapter are criticisms of the adjustments to the construction of the PSC, in that:
- Its wide risk ranges were never adjusted to reflect the increasingly narrow risks that ended up being built into the PPP contracts;
- the VfM ignored contract management costs of the PPP;
- the 30-year analyses have no substantive value;
- that the 7.5-year analyses, even when putting aside the debate regarding public sector financing costs, do not show value for money (this has now seemingly been echoed by NAO);
- the "wider factors" did not include either a full listing of downside risks, or some attempt to give them financial weight or, failing a full analysis, some discussion of commercial significance; and
- that there was an overall breakdown in the chain of verification of the VfM process.
This report, as a consultation response, was of course shared with LUL management.
TfL staff are available to discuss the above reports and correspondence at the Committee's convenience. We believe now, as we believed then, that the public bond alternative would have provided a more prudent and cost-effective approach to financing the modernisation of the Tube.
Robert R Kiley
Commissioner of Transport
7 July 2004
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14 Not printed.