1.  This memorandum sets out the response of the Department for Transport, Local Government and the Regions to the Committee's request for information, pursuant to its inquiry into London Underground.

  2.  The former Department of the Environment, Transport and the Regions provided evidence for inquiries by the then Transport sub-committee of the Environment, Transport and Regional Affairs Committee between 1998 and 2000. This memorandum provides a situation report on progress towards putting in place a stable regime for investment in the Underground, and considers the specific areas of interest to the Committee as described in their 25 September call for evidence.

BACKGROUND

  3.  The Government announced plans for the modernisation of London Underground on 20 March 1998. The proposals were based on the Government's manifesto commitment to develop a public private partnership. They were the result of a thorough consideration of all of the options for modernising the Underground, including the use of bonds, but having ruled out privatisation. There followed extensive discussions with London Underground and consideration of professional external advice. The modernisation plans now form an integral part of the Government's plan for transport, as set out in "Transport 2010-the 10 Year Plan", published on 20 July 2000.

  4.  The Government believes that the modernisation plans now being finalised are the best way forward for London Underground. Under the proposed arrangements, London Underground will run the Tube, and will manage three substantially identical contracts with the private sector to maintain and modernise the infrastructure. London Underground will remain in control and will be responsible for safety, as it is now. The private sector Infrastructure Companies will need to deliver the improvements specified by London Underground.

  5.  The proposals utilise private sector companies in construction and project management to deliver improved infrastructure on the basis of stable, long term investment, allowing London Underground to concentrate on what it does best: being a transport operator. The investment these plans will unlock—£13 billion over fifteen years—will address the issue of fluctuating and inadequate funding from which the Underground has suffered over time. The benefits to passengers of this structure will be significant.

  6.  The structure for modernising London Underground in partnership with the private sector was extensively debated in Parliament, during the passage of the Greater London Authority Act 1999 ("GLA Act").

  7.  Implementation of the modernisation plans, including the process for awarding three contracts for the maintenance and upgrading of the Underground's infrastructure, is the responsibility of London Transport and London Underground, not the Government. The competition for the contracts is reaching its final stages, and preferred bidders have been appointed for all three contracts. The final commercial negotiations are well advanced. London Underground expects the contracts to be finalised in the current financial year.

  8.  The Secretary of State has a number of formal roles in relation to the implementation of the modernisation plans. The key roles are provided for by the GLA Act, and the London Regional Transport Act 1984 (the "LRT Act"). They are designation of contracts as a "PPP agreement" (GLA Act), the appointment of a "PPP Arbiter" (GLA Act), and the decision as to whether to give consent to the transfer of the Infrastructure Companies to the private sector (LRT Act). The Secretary of State also has an important role to play in committing long term funding to Transport for London through the GLA Transport Grant to support London Underground's financial requirements resulting from the modernisation plans.

INDEPENDENT AUDIT AND VALUE FOR MONEY

  9.  The Government's preference for a publicly run, privately built solution to the long-term funding problems of London Underground is based on a determination to deliver best value for the Tube, its passengers and the taxpayer. For this reason, contracts will only be awarded to the private sector if bids show that they are likely to deliver better value than the public sector alternatives.

  10.  London Underground is carrying out a rigorous assessment of the proposed arrangements. London Underground, and its parent, London Transport, will be responsible for assessing the proposed arrangements and deciding whether to proceed. They will take full account of value for money considerations when making that assessment.

  11.  The Department understands that London Transport has asked its external auditors KPMG to undertake an audit of the financial evaluation. This is designed to provide an independent opinion on whether the Public Sector Comparators London Underground has employed represent a robust basis for evaluating the value for money of the private sector bids.

  12.  The Secretary of State is responsible for providing funding to London Underground through grant. The Government will wish to satisfy itself that the Tube modernisation plans are genuinely likely to represent value for money, and the Department has asked the financial advisers Ernst & Young to provide an independent opinion on the value for money offered by each of the three proposed contracts before any is signed. Ernst & Young will focus in particular on the overall robustness of the value for money conclusions reached by London Underground and its advisers.

  13.  The Tube modernisation plans will also be open to the full scrutiny of the National Audit Office ("NAO"). Indeed, the NAO has already produced a report into the financial analysis of the London Underground Public Private Partnerships. This report made a number of recommendations about how London Underground should carry out the final value for money evaluation, in particular stressing the importance of considering wider factors that cannot be readily quantified in financial terms. London Underground will have full regard to these recommendations when it evaluates the value for money of the final bids before signing contracts. The Department has also asked Ernst & Young as part of its review to consider the issues raised by the NAO, as well as the points made by Transport for London and its advisers Deloitte and Touche in their own assessments.

HOW MUCH INFORMATION ABOUT THE CONTRACTS SHOULD BE PUBLISHED BEFORE THEY ARE SIGNED

  14.  The Government and London Underground have made clear that the contracts will be published in full once the competition is complete, save for elements whose publication could, in particular, prejudice the competitive position of the public sector in future transactions, or breach the commercial confidence of a third party. This is in line with the practice set out in the Code of Practice on Access to Government Information (2nd Ed, 1997). Publishing all the details of the contracts prior to signature would run the risk of prejudicing negotiations with the bidders and undermine London Underground's ability to obtain best value for money.

  15.  London Underground has consulted the Mayor of London and Transport for London as the competition has proceeded, including on the development of the contracts, as is required by the GLA Act.

THE ALLOCATION OF RISK BETWEEN THE PUBLIC AND THE PRIVATE SECTORS

  16.  The transfer of risk to the private sector is a key element of the Government's plans for the Underground. It is highly desirable that the private sector should bear those risks which it is best placed to manage. It is also very desirable that the private sector should retain responsibility for the condition of the assets over a long period, so that they focus on whole-life asset management. The contracts have been designed and negotiated to achieve the optimum level of risk transfer; they are not based on a dogmatic desire simply to shift risk to the private sector.

  17.  The concept of whole life asset management is central to the modernisation plans. The Infrastructure Companies will be responsible for the efficient maintenance and renewal of the assets over a long period (thirty years) and will need to make decisions that deliver high quality asset performance in the long term. They will need to take account of systems integration issues, to ensure the compatibility of all equipment.

  18.  The infrastucture companies will also be subject to a performance regime, under which they are required to maintain and improve the track, trains, signalling, civil infrastructure and stations to enable London Underground to operate higher quality and more reliable services with greater capacity. The companies will be paid more for better performance and lose money if they fail to deliver the improvements required. To make the returns that they are projecting the infrastructure companies will have to meet and exceed London Undergrounds's targets.

ACCOUNTABILITY AND REGULATION FOLLOWING CONTRACT SIGNATURE

  19.  The Government has stated its intention, in accordance with the provisions of the GLA Act, to transfer London Underground Limited to Transport for London, once the competitions have been completed. This transfer is expected to take place around Spring 2002. Following transfer, London Underground in the public sector as part of the Transport for London "family" will continue to manage the contracts with the private sector Infrastructure Companies and guarantee the obligations of London Underground under those contracts. It will be for Transport for London to consider what arrangements it wishes to put in place to manage its relationship with London Underground, its subsidiary.

  20.  In this structure, London Underground will be accountable to the people of London thought the Mayor of London. In turn, the private sector Infrastructure Companies will be responsible to London Underground through the tight contractual framework currently being negotiated.

  21.  The Tube is a vital national asset, and receives income from the taxpayer. The Government is keen to secure its future, by putting in place a regime for stable investment, before effecting the transfer of London Underground to Transport for London. In determining the level of grant to be provided for the first seven years the Government will agree longer term targets for the performance of the Underground with the Mayor of London and Transport for London. These will aim to cut journey times by increasing capacity and reducing delays, delivering year on year improvements in reliability and passenger satisfaction.

  22.  Transport for London is a Best Value Authority, within the meaning of the Local Government Act 1999. London Underground, as a subsidiary of Transport for London, will be subject to the best value regime set out in that Act, which requires, among other things, such an authority's functions to be reviewed, and that there be regular reports on performance. London Underground will thus be accountable to Londoners through the requirements that regime places on Transport for London. It would be for Transport for London to consider and put in place any additional performance regime for London Underground.

INCREASING CAPACITY ON THE NETWORK, AND INTEGRATION

  23.  The modernisation plans currently being negotiated by London Underground provide for an increase in capacity on the existing network, of some 15 per cent over the life of the modernisation project. The plans will also provide flexibility for the Mayor to increase the improvements to be delivered by the private sector Infrastructure Companies. In addition to provisions allowing for safety improvements and minor works, the modernisation plans allow for additional major enhancements to the network, such as station rebuilding projects or line extensions. Decisions on whether such extensions should go ahead will lie with the Mayor of London and Transport for London, as the new owners of London Underground in accordance with the provisions of the GLA Act and the Mayor's Transport Strategy.

STAFF RIGHTS

  24.  As the Committee may be aware, on 20 March 1998 the Government wrote to all London Transport and London Underground staff about the Government's plans for London Underground, making clear that staff would:

Have the right to remain in the London Transport pension fund, as contributing members;

Continue to benefit from concessionary travel arrangements;

Continue to enjoy the rights under their then existing employment contracts, covering pay, hours, leave, collective agreements and union representation.

  25.  Pay, terms and conditions of employment, pension rights, concessionary travel, and existing collective agreements for all Infrastructure Company staff, will be protected under a contractually binding "Code of Practice" between London Underground and the Infrastructure Companies, offering equivalent protection to TUPE.

  26.  Pensions of LT Staff who become employees of the Infrastructure Companies are further protected by virtue of provisions in the GLA Act and the LT Pensions Arrangements Order 1999.

PASSENGER AND STAFF SAFETY

  27.  London Underground has an excellent safety record. Safety on London Underground is the first and overriding priority. The Health and Safety Executive (HSE) accepted in March 2000 London Underground's safety case in its current structure, with one operating company and three separate Infrastructure Companies, established as subsidiaries of London Underground. Before the modernisation plans can go ahead, the HSE will have a further double lock on safety. First, the HSE is currently examining London Underground's safety arrangements under tough new regulations, the Railways (Safety Case) Regulations 2000. It will then consider the safety arrangements again reflecting the involvement of private sector Infrastructure Companies. The Government has made a clear commitment that if these safety tests are not passed the plans will not go ahead.

DTLR

15 October 2001