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A private function

This week London's Transport Commissioner Bob Kiley starts work. His first job is to tackle concerns he shares with his boss London Mayor Ken Livingstone about the £8bn privately financed upgrade of the Underground. Nina Lovelace reports.

FINDING A way to modify Government plans to upgrade London's ailing Underground system is expected to be Bob Kiley's top priority when he starts his new post as London's Transport Commissioner this week.

As head of Transport for London (TfL), Kiley is due to become responsible for the Tube in four months time. This is when control of London Underground is expected to be transferred to TfL, after the Government has signed contracts for the privately financed upgrade.

Kiley and London Mayor Ken Livingstone believe that the Public Private Partnership is potentially unsafe and will not give Londoners value for money.

Deputy Prime Minister John Prescott disagrees.

Unless a middle way is found, the Government risks the embarrassment of Kiley - the man hailed as the saviour of New York's subway - resigning. It is also possible that Livingstone will bring legal action to stop the PPP. Neither is an attractive scenario with a General Election looming.

Transport specialists and short listed bidders for the project say it is 'inevitable' that in the next few weeks Kiley and Prescott will find a way of reconciling their conflicting views on how the part privatisation plan will go ahead.

The Government announced in 1998 that the Underground's infrastructure would be passed over to the private sector for upgrade work for the next 30 years, in the form of three PPP contracts worth £8bn.

This would involve the private sector paying for the work up front and being repaid by TfL and the Government on an annual basis from ticket revenues and grants respectively.

Payments can be withheld if the companies involved fail to deliver.

The main driver for the decision to use private finance was that the Underground, crippled by a £1.2 bn investment backlog, urgently needs cash. With Chancellor Gordon Brown keeping a tight rein on publicly funded investment, Prescott has been forced to seek a privately financed solution that spreads payment for the work over 30 years.

Kiley says the contracts give TfL little control over how the infrastructure upgrade and ongoing maintenance programmes are carried out by the private sector. Instead, TfL's involvement with the Tube will be confined to running trains and staffing stations.

Kiley says the plans will leave TfL unable to withhold more than 10% of payment should a PPP consortia fail to fulfil performance criteria set out in their contracts.

Under the PPP agreements, TfL is unable to substitute a new consortium without giving 12 months' notice.

During that year, Kiley fears the incumbent group would only do the bare minimum to complete its contractual duties, safe in the knowledge it cannot be immediately removed.

Kiley has warned that there is little flexibility in the PPP arrangements. Under current plans, consortia must also be given 12 months notice should TfL require any changes to the programme or the scope of works.

He has also repeatedly said he is not convinced that a detailed asset inventory for the underground actually exists, so bidders for the PPP have no real idea about the scope of the work they are taking on.

The bidders are less concerned about this. A source close to one says: 'It's unreasonable to assume London Underground could ever have an asset database that was 100% accurate.'

The PPP also appears to be failing to pass the Government's own checks, most recently receiving a 'flashing amber light' from the National Audit Office which remains unconvinced that the 30 year PPP contracts offer better value for money than a publicly funded upgrade.

However, bidders downplayed the report's value this week because it has been issued before contracts are signed.

'It's inconclusive, ' said a spokesman for Metronet, involved in negotiations for the Bakerloo, Central and Victoria lines contract and the subsurface lines contract. 'But it was going to be anyway because it was done before all the figures were in.'

There is also continuing uncertainty about the PPP's ability to satisfy safety concerns, heightened by recent accidents like the Hatfield crash. Rail unions are polling members on strike action unless a new body is set up to enforce safety standards throughout the life of the contracts.

Kiley has his own ideas as to how the Tube should be upgraded. He wants to invest £10.25bn into the Underground over 15 years, funded by bonds issued by TfL. This would mean both infrastructure and operations would remain in TfL's hands.

The bonds would be repaid by passenger revenues and would not require underwriting by the Government.

Remaining funds would come from a £250M annual grant from the Government and £100M annually from Greater London Authority revenues, possibly including congestion charging.

Another £150M investment would come from the private sector, but this would amount to only 10% of the asset cost.

The bidders argue that this plan is undesirable because it would delay work starting on the Tube as they would have to rethink their proposals.

Other tube experts doubt whether funding the Underground via schemes such as congestion charging would be feasible. They are also sceptical about whether the Government could commit to a fixed annual grant.

Independent transport consultant Alastair Dick believes one compromise would be still to go forward with choosing preferred bidders but leave the financing details until after the election, removing much of the political element.

However, Imperial College transport professor and long term critic of the PPP Stephen Glaister is pessimistic. 'My suspicion is it will all fall apart. The Government has two choices, either to slow things down so the PPP issue is still live over the election, or follow a different course of action - drawing up a real solution.'

Glaister believes there is still time for the Government to adopt Kiley's own plans for the tube.

'I think that it (the PPP) will be delayed in any case, ' he says, 'Mainly because I'm doubtful that the private sector will be able to get the money together: knowledge of the asset state is limited, so it will be hard for the financial markets to commit themselves.'

But bidders are tiring of the uncertainty. One said: 'The debate that is going on is deeply unsettling and has caused discussions within the consortia.'

He added, 'Nothing would please the bidders more if Kiley and the Government can find a way forward to a solution based on the PPP, simply because the PPP solution is the most advanced.'

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