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Facing down the; Underground; resistance

London Underground is determined to push through its privately financed plan to upgrade the Tube despite private sector scepticism and a slipping procurement timetable. Antony Oliver spoke exclusively to London Transport chief executive Denis Tunnicliffe

London Transport chief executive Denis Tunnicliffe remains pragmatic about the stuttering progress of plans to finance the Underground through a public private partnership.

'It is a great mistake of managers to plan too many steps ahead. There is no plan B,' says Tunnicliffe. 'We have great faith in plan A and that is what we are planning to do, an utterly and unconditional commitment to plan A.'

But plan A is late. When Deputy Prime Minister John Prescott announced the Government's intention to finance the Underground via a public private partnership, all deals were to be struck by May 2000 to coincide with the election of a London mayor. London Underground's recent progress report on the deal now accepts this will be 'late 2000 or 2001'.

And as the report also points out, the deal will only happen 'provided that it proves to be the best value way of meeting this objective'. Tunnicliffe agrees but adds: 'There is a whole series of esoteric 'what if's' I could really hurt my mind over. But I don't.

'We believe this is a good solution to the challenge. It will bring private sector money in and involve the private sector in areas it is already skilled at.'

The PPP plan will see LUL split into three private sector Infracos to maintain and enhance the Tube's infrastructure (see box). There will also be a single publicly owned Opsco to run the trains, operate the stations and organise train timetables.

The Infracos will be responsible for maintaining and enhancing the network's track, signals, rolling stock and stations. They will have to plan, finance and carry out the necessary work over 25-30 year concessions.

The publicly owned Opsco will give the public sector control over the running of services, maintaining the perception that the Tube remains in public hands. As such the 'public face' of the Tube will be a publicly owned company. The future Greater London Authority will effectively retain the 'freehold' of the Underground and will reclaim ownership on completion of the 25-30 year Infraco concessions.

LT has already spent a substantial amount of time in consultation with potential bidders. This process helped convince the Government that, if good value for money was to be achieved, the original timetable was too optimistic. And it certainly has been slipping. Bidders were to be prequalified by the end of 1998 with invitations to tender sent to shortlisted bidders in spring 1999. The latter has now slipped to autumn, putting the process at least six months behind schedule.

So with no chance of reaching financial close on the deals by May 2000, control of the Tube has subsequently been taken away from the Mayor until all deals with new Infracos have been signed and the PPP is up and running.

By removing this 'fixed in stone' deadline, the Government believes the PPP timetable can now proceed at its own pace. 'Negotiating against a self-imposed deadline could compromise value for money,' says LUL's progress report on the PPP plan which was published last week. By giving the private sector time to properly carry out due diligence at preferred bidder stage - that is to confirm or otherwise what they believe they are getting into - their ability to transfer risk from the public sector will be substantially enhanced.

Tunnicliffe is even more optimistic: 'I believe that the private sector will be delighted when it gets to see the data.' He adds: 'They are going to be in a hell of an improved position compared to what I understand the level of knowledge was at the time of rail denationalisation.'

No decisions have been made yet as to the number of firms that will be invited to bid, 'but the current expectation is that there will be three or four for each Infraco,' says the LUL report. Compensation for failed bidders says Tunnicliffe, is 'extremely unlikely'. But he justifies having up to four bidders by saying that good competition is essential. He adds: 'If a lot of people are unhappy or want to put caveats on their pre-qualification then that is something we will have to have regard for.'

The original six month tender period has also now been cropped to five months. This comes despite comments during consultation that the 'six month bid period proposed was generally seen as achievable but ambitious'. However, no limit on the due diligence to financial close period has been set. Originally a six month period was proposed.

'What we would expect is that the market place in the bidding process will be showing us its view of risk transfer,' he says. 'We do not say all risks will be transferred. We are talking about optimal risk transfer. I think it will be a matter of listening to bidders and asking what they are worried about and what they feel comfortable about.'

The whole basis of the PPP plan is to attract private sector cash to rebuild the network's ageing infrastructure. The intention is to use the money raised to wipe clean the £1.2bn plus backlog of maintenance and refurbishment work, provide funds to continue investing in the network and tackle an estimated £200M to £300M a year maintenance bill.

Current LUL estimates put the funds required over the next 15 years at £8.14bn plus an annual maintenance spend of £286M. But raising cash to enhance the network by further improving the infrastructure, replacing old trains and refurbishing stations is also seen as a priority.

Bidding for a contract as complex and difficult as an Infraco concession will come with substantial risks attached. The Government's priority is to ensure best value for money when it transfers the network to private sector control. It has therefore to establish an appropriate balance between risk and reward for the private operators.

In its initial consultation document, LUL accepted that upgrading certain parts of the infrastructure would be harder to price than others. The 'main assets where uncertainty is likely to be greater' included the 'tunnels, some track, some structures [and] some communications equipment,' says the document. On the other hand, 'main assets where full risk transfer is likely to be possible' include 'most track' and 'most structures'.

Tunnicliffe is unconcerned. 'We feel that the due diligence will not be over onerous,' he insists. 'I think bidders will find a very comprehensive review of our assets. We have already got a process under way with Ove Arup 'underwriting' that view.'

That said, with LUL concluding that 'full risk transfer is unlikely' it is expected that private sector costs will be high. This suggests upgrade work could need an element of subsidy if it is to go ahead under a PPP arrangement - although Tunnicliffe insists this has been calculated as 'between nothing and modest'.

'We took advice as to what the market was capable of,' he says. 'We took the view that bids would be better than the public sector comparator.'

And that is basically why Tunnicliffe is sticking with the current PPP plan despite the myriad of alternative options put forward now and in the past - he wants to make the deal work. Tunnicliffe knows and loves the Tube and wants to achieve a funding mechanism that works.

'I don't look at options outside my mandate. But clearly I would not have been going along with it if I didn't feel it was a good value for money way forward. I am now in the process of making it a successful way forward.'

'We will get to the decently modern metro - a fully exploited inherited asset,' Tunnicliffe asserts. 'I see that as taking another decade. We are in the middle of what I hope will be a golden period for the Underground.'

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