This Memorandum is London Underground's formal response to the inquiry into London Underground and the Public Private Partnership currently being carried out by the Transport Sub-Committee.

  This document provides an update on evidence presented to the former Transport sub-committee of the Environment, Transport and Regional Affairs Committee between 1998 and 2000 and it provides a specific response to the questions posed by the Sub-Committee in its Press notice of 25 September 2001.

BACKGROUND AND CURRENT STATUS

—  Government policy on the future funding of London Underground was set out in the Labour Party manifesto of 1997 and took shape in plans announced by DETR during March 1998.

—  The PPP involves creating three infrastructure companies "Infracos" to maintain, upgrade and replace track, signalling, trains, stations and other engineering assets. Train and station operations, signalling control and safety management, remain with LUL in the public sector.

—  Following a market consultation exercise, LUL began the formal competition for the PPP contracts, which involved identifying potential bidders; shortlisting and selecting preferred bidders for the three Infraco contracts.

—  Preferred bidders for two of the three Infracos—those covering the Bakerloo, Central and Victoria Lines (Infraco BCV) and Jubilee, Northern and Piccadilly Lines (Infraco JNP) were selected by the Board of London Regional Transport on 2 May 2001.

—  This Board then selected a preferred bidder for the Sub Surface Lines (District, Circle, Hammersmith and City and Metropolitan Lines) on 19 September 2001.

—  Commercial discussions with the preferred bidders are currently progressing to finalise the PPP contracts. We expect to be in a position to sign the contracts in the current financial year.

—  The PPP will not proceed unless and until two critical outstanding tests are met concerning safety and value for money. These tests are detailed later in this memorandum.

RESPONSE TO SPECIFIC ISSUES RAISED BY THE TRANSPORT SUB-COMMITTEE

1.   Under what conditions should the government sign PPP contracts?

  1.1  Comment on the desirability of an independent audit prior to signing to ensure value for money.

  HM Government will not sign the PPP contracts. The contracts will be between London Underground Limited and the private sector bidders.

  The Government has consistently made clear its position that PPP would not proceed unless it was shown to be value for money—a position endorsed by LRT/LUL. The process for assessing value for money is as follows:—

(a)  LUL/PricewaterhouseCoopers and Ove Arup will recalculate the "Public Sector Comparator" (an estimate of what it would cost for the public sector to deliver the outputs to be achieved by the PPP) on the basis of final draft contract documents. This will be presented as a range of possible values, reflecting different assumptions and judgements about how the public sector might perform.

(b)  KPMG (LUL's auditors) will audit the revised PSC.

(c)  The final prices received from bidders will be compared against the PSC.

(d)  This financial comparison will be supplemented by an analysis of wider factors as recommended by the National Audit Office, including factors "which are either difficult or impossible to quantify in financial terms, and which could impact directly on the value of the different options" according to the NAO. These will include strategic issues such as the potential benefits of access to private sector efficiencies and skills in asset management, and the impact of the different incentives and constraints acting on private and public sector management.

EXTERNAL SCRUTINY

(i)  The Mayor, Ken Livingstone, and Transport for London will have the opportunity to review and comment on the analysis in consultation with LUL.

(ii)  The government will consider a comprehensive review of all the above to be undertaken by Ernst and Young.

  The NAO will have the opportunity to report on this process, although the timing and basis of their report is obviously a matter for them. LUL will fully co-operate with the NAO in any analysis they wish to undertake during the process of finalising the value for money analysis.

  1.2  How much information about the precise nature of the contracts should be made public before they are signed?

  London Underground has a statutory duty to consult the Mayor and TfL on the implementation of the PPP, and has provided full access to all the contract documents as part of that process. LUL consider that these arrangements provide an appropriate balance between the desirability for there to be an independent scrutiny of the detail of the contracts and the need to avoid conducting commercial negotiations in public. It has always been LUL's positions that the main details of the contracts would be made public following contract award.

  1.3  What is the allocation of risk between the public and private sectors?

  LUL believes that key drivers of performance and value for money are clear transfers of risk to the private sector in the areas of whole life asset management and engineering systems integration.

  The optimum risk transfer as a whole is determined by value for money considerations. The value for money analysis, and the detailed contract scrutiny provided by the consultation arrangements therefore provide ample opportunity to review the risk allocation position.

  1.4  What opportunities exist to adjust the contracts after they have been signed; and the role of arbitration in the event of dispute over the contracts?

  The contracts provide many mechanisms to allow changing circumstances to be allowed for at both day-to-day and strategic levels: for example, Minor Works, Intermediate Works, LUL Specified Rights, Major Enhancements, Periodic Review, Safety Changes and changes to standards. LUL considers that it would not be appropriate to extend the scope of Extraordinary Review.

  These have already been the subject of extensive exchanges with TfL both as a part of the consultation process, and in discussion, and there will be a further opportunity for comment in a final round of consultation before the contract terms are settled.

2.   How implementation maximises benefits and minimises disadvantages

  2.1  Comment on TfL regulation and public accountability

  The PPP is regulated using both legal powers, and rights under the PPP contracts. In each case, the regulation is exercised technically by LUL. The most significant area of statutory regulation is, of course, safety, where LUL is the Infrastructure Controller, with overall responsibility for safety over the network as a whole. It is a criminal offence for anyone doing work on the railway not to co-operate with LUL as Infrastructure Controller, and enforcement action can be taken by the HSE. These legal obligations are backed up by contractual requirements for infracos to have safety cases (which they are not currently required to have by law).

  At an operational level regulation comes through LUL's rights to run the railway in a way which responds to day-to-day needs, its rights to manage incidents, and its rights to "step-in" and take over the running of infracos activities.

  If infracos are not performing adequately, LUL has a variety of measures it can take, including the imposition of stringent financial penalties and other steps.

  2.2  Setting and monitoring performance targets for LUL

  London Underground's research has consistently shown that, after safety which is always the first consideration, what is most important to customers is to have short and reliable journey times. Next most important is the general ambience of their travelling environment. Accordingly, the PPP performance objectives focus on these areas, which are also the key objectives for LUL itself.

  2.3  Comment on the current status of Underground and Union relations

  It is in everyone's interest—LUL, infracos, TfL, London—to have good industrial relations. In relation to PPP, the Government has given clear assurances which ensure the protection of the position of staff transferring from public to private sector.

  There is a long history of poor industrial relation on the Underground. The new team of LUL Directors appointed from September 1999 has analysed the causes of this situation in some depth and is now addressing them. The recent calling off of threatened strikes marks the start of what is hoped will be a successful reform of the relationships between the Company and its trades unions.

  2.4  Comments on passenger and staff safety

  The standards of safety and the requirements for continuous improvements are rooted in statute, and apply equally in the PPP world as now.

  The Underground has an in-depth understanding of all its major accident and incident risks, and the associated risk control systems, which ensure that these risks are reduced to as low as reasonably practicable-as required by Health and Safety law.

  As a result, LUL has developed a good safety track record—better than any comparable metro system around the world. The last major collision occurred more than 27 years ago.

  The rigorous management arrangements which have achieved this record are mandated in the PPP contracts—which also require that they continue to be improved as required by the Health and Safety at Work Act 1974, and reinforced by all the specific regulations made under the Act which are relevant to railways.

  In designing the PPP architecture close attention has been given to ensuring that the contractual and safety regimes work together to improve the safety performance into the future. The aim is further improving the safety leadership and supporting management arrangements of the organisation.

  In addition to LUL's own internal safety management processes, the Safety Case for the PPP arrangements is also currently subject to rigorous assessment by the Health and Safety Executive (HSE) as required by the Railways (Safety Case) Regulations 2000. HSE must accept the Safety Case, in accordance with these Regulations, before the PPP can proceed.