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Social criteria a major factor in reaching Tube PPP decision

NEWS: Hard to quantify social benefits tipped the balance in favour of a privately financed Tube upgrade last week.

ARRIVING AT the £2bn in social benefits that upgrading the Tube with private finance will generate was a 'subjective' process, government advisor Ernst & Young said last week.

Yet it was this figure that spurred Transport Secretary Stephen Byers to give the Public Private Partnership (PPP) scheme the go ahead.

Ernst & Young said that the figure could be millions less - or more - in its report, which Byers used to justify going ahead with the PPP. If the benefits are less, it is possible that the taxpayer could get better value for money if the project is done with public money.

Ernst & Young's report resulted from a check on a value for money assessment of the Tube PPP carried out for London Underground (LUL) by PriceWaterhouseCoopers (PWC) to ensure the process had been carried out correctly.

PWC examined a publicly funded option and a 'stable funding' option under which Transport for London would finance the upgrade with guaranteed funds over several decades.

Social benefits criteria take into account the economic effects of previous projects undertaken by London Underground and work carried out for LUL and other PPP clients by members of the Metronet and Tubelines consortia.

Metronet and Tubelines are preferred bidders for the PPP.

Metronet members include Balfour Beatty, WS Atkins, Thames Water, Seeboard and Adtranz. Tubelines comprises Jarvis, Amey Bechtel and Halcrow This meant that when carrying out the value for money assessment, PWC assumed that if LUL did the work, costs would overrun, the programme would fall behind and the end product would not work as well as intended - as happened with the Jubilee Line Extension.

In comparison, PWC lowered the overall capital cost of the PPP as it was assumed Metronet and Tubelines would bring the work in early and under budget as their members had done on other PPP projects.

In its report, Ernst & Young says: 'We understand that the adjustment is based on LUL's estimate of social costs/benefits of increased or decreased journey and service times. As such, the adjustments are a subjective measure.

'The social cost adjustments increase the cost of the public sector option by 9% and decrease the cost of the private sector option by 5%, giving a net movement of £2.1bn (over 30 years).'

But despite the subjectivity, Ernst & Young agrees with PWC's use of social cost/benefit criteria.

'The use of social benefit adjustments, when clearly presented, should be seen as a valuable method of helping decision makers assess the impact of a wider value for money issue, ' it says.

This contrasts with the view of London's transport commissioner Bob Kiley whose own consultant Deloitte & Touche says in its report that such adjustments to the public sector comparator are 'judgmental, volatile or statistically simplistic.'

The social/benefit adjustment was carried out after an extensive comparison of the cash values of public and private sector options for the Tube upgrade over 30 years.

Both processes are typical in carrying out a value for money test as prescribed by the Treasury.

And it is clear that LUL carried out its procurement with some rigour, to ensure that as accurate a comparison with a publicly funded solution could be made.

In its comparison, PWC highlighted that, for example, bidders were urged by LUL to revise their bids upwards as their initial bids were thought to be 'unrealistic' and could potentially produce a distorted comparison in favour of the PPP.

'In evaluating best and final offer bids for Infraco SSL (the sub surface lines franchise), LUL formed the view that the bidders had used what LUL considered to be unrealistic assumptions about train and power systems performance.'

Bidders were subsequently asked to resubmit their bids.

Ultimately, the decision on the PPP looks to have been a political one. Judging from the success of other PPP projects in getting work done on time and to budget, it is to be hoped that the Tube upgrade will be something the politicians can be proud of. But upgrading the Tube is a hugely complex project, and it could be many years before the true value of using a privately financed solution can be assessed.

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