47 The financial analysis described in the preceding sections of this report is not sufficient on its own to ascertain which option offers best value for money. There is a wide range of other factors, which are either difficult or impossible to quantify in financial terms, and which could impact directly on the value of the different options. Such factors cover both the structure of the PPP and the implementation of that structure. They include:
■ strategic issues: the strategic decision to award long-term contracts to the private sector involves risks and benefits. London Underground considers that the expected benefits include potential access to private sector efficiencies and skills in asset management and in managing infrastructure; and clearer incentives through a contract than exist with a wholly public sector operation. Possible risks arise from the division of responsibility for the Tube network and a potential loss of flexibility as it may become harder to re-set objectives for the infrastructure in the face of changing circumstances, such as an increase or decrease in passenger demand or shifts in the pattern of commuting from one part of London to another.
■ the PPP contractual framework: the value for money of the PPP approach depends on the flexibility and enforceability of the contracts to be signed with winning bidders. Given that the contracts run over 30 years, some flexibility is required, but too much flexibility could allow bidders to raise prices during the course of the contract as unexpected contingencies arise. To the extent that the contract is unenforceable, bidders may in future be able to depart from prices or commercial terms agreed now in negotiations with London Underground. London Underground therefore needs to assure itself that the proposed contracts are robust, that bidders will have adequate financial capacity and that they will not be able to demand excessive increases in payment as new requirements or unexpected contingencies emerge.
■ the incentives in the performance specification: the PPP contractual framework includes financial incentives to improve performance in three areas beyond benchmark levels: the capability of the infrastructure to support train services, the actual availability of train services and the ambience of the environment provided to passengers. The benchmark levels are set above current performance, (except for availability, which is set at 95 per cent of current performance). Bidders are incentivised by a payment mechanism to meet these targets and they incur penalties if performance declines. The value for money of the PPP approach depends on the extent to which this performance specification avoids perverse incentives and successfully incentivises private sector entities to deliver long-run improvements in the service provided to London Underground's passengers.9
■ long term partnership: London Underground will need to consider how well bidders would take to a long-term partnering arrangement with London Underground and Transport for London. In a new 30 year arrangement, co-operation on all sides is crucial and may alleviate some of the strategic and contractual risks. Building partnership in this case is complicated because of the handover of overall responsibility for the Tube to Transport for London, whose staff have not yet been directly involved in the procurement process, although they have been consulted at certain points.
■ risk management: the successful implementation of improvements to the Tube infrastructure requires effective risk analysis and management. Any value for money decision should be supported by a comprehensive risk analysis covering both operational risks (for example, the risk of deteriorating performance under the PPP framework) and contractual risks (for example, the risk of contract termination and change of control of winning bidders). This analysis should be clear about which party bears each risk and who is best able to manage it.
48 London Underground has confirmed that it will continue to take all these factors into account in its final value for money appraisal. We intend to prepare a further report after the final decision has been taken.
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9 The specification balances capability, availability and ambience. There are trade-offs between the three areas. For example, passengers may tolerate poorer ambience, such as less pleasant environments from which to board trains, in return for a higher train frequency.