1 London Transport is currently in the process of evaluating bids for the Public Private Partnerships (PPP) for the funding and management of the infrastructure of the Tube. London Underground Limited (London Underground) is the subsidiary of London Transport responsible for implementing the PPP approach. This approach involves the transfer of trains, stations, track and some 6000 staff to three separate infrastructure companies under 30 year contracts for different parts of the Tube. In March 2000, the contracts were expected to deliver £12-13 billion of capital and maintenance work in the first 15 years of the contract1. Under the PPP approach, London Underground will retain responsibility for the operation of train and station services. Appendix 1 describes the PPP contractual framework in more detail.
2 London Underground has now received Best and Final Offers from bidders for two of the three PPP contracts2. The bidding process for the third contract is at a less advanced stage. After considering bids, London Transport will make a recommendation to the Secretary of State for the Environment, Transport and the Regions, who will take the final decision on whether to approve the PPP contracts. On present plans, London Transport will transfer its responsibilities to Transport for London in the summer of 2001.
3 The Department of Environment, Transport and the Regions (the Department) and London Transport intend to award the PPP contracts to private sector bidders only if they pass two separate tests:
■ the safety test: whether changes to the structure of the Tube will maintain or improve current safety standards;
■ the value for money test: whether the bidders offer superior value for money when compared to an alternative, publicly-funded infrastructure operation.
4 To inform the judgement about value for money, London Underground is undertaking extensive financial analysis. It has prepared estimates of the likely cost of publicly funding the infrastructure under alternative financing scenarios, including the issue of bonds. These cost estimates, which are made for the Tube infrastructure as a whole and for the three infrastructure companies, are called Public Sector Comparators (Comparators). London Underground has also evaluated the Best and Final Offers from bidders for the PPP contracts and estimated the likely costs of each. At the core of the financial analysis is a comparison between these two sets of estimated costs.
5 Following a recommendation from the Environment, Transport and Regional Affairs Committee3, we decided to report on the extent to which London Underground's financial analysis resolves the value for money test. Our methodology is explained in Appendix 2. The safety test is being considered by London Transport and the Health and Safety Executive and is not part of this report.
6 The report focuses on London Underground's methodology for the financial analysis of bids and the Comparators. Negotiations with bidders are still underway, so final figures are not available. The government's policy is that information on the value of the overall or individual Public Sector Comparators would risk giving bidders an advantage in the contract negotiations and therefore could have an adverse impact on value for money. In the light of this policy, our published analysis is at the level of the infrastructure as a whole, rather than the individual parts of the infrastructure which are the subject of bids, and no absolute values for the Comparators or bids are given. We are however keeping the whole bidding and decision process under review, and will report further as necessary. Meanwhile, we have published this first report to give analysis and comment at this stage for the benefit of Parliament.
5 We consider that London Underground has undertaken a thorough process in estimating the costs of public sector and PPP options. The ranges of values produced from the Comparators are of some use in guiding judgement. But, as London Underground recognises, a decision taken only on the basis of where a bid lies compared to the ranges for the Comparators would be unsound. The financial analysis provides useful but incomplete insight into the value for money of alternative approaches to managing and funding the Underground's infrastructure. The financial analysis does not, and could not, take into account all the factors which are relevant to assessing the relative value for money of the alternative approaches. It is essential that decision makers understand what lies behind the figures before reaching a conclusion. The main sections explain these conclusions further.
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1 Environment, Transport and Regional Affairs Committee, 14th report 1999-2000: Funding of London Underground, HC 411
2 Bids have been received for the BCV infrastructure contract, covering the Bakerloo, Central and Victoria Lines, and the JNP infrastructure contract, covering Jubilee, Northern and Piccadilly lines.