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Tube Lines rejects Arbiter's orders to cut costs

The Arbiter for the London Underground Public-Private Partnership (PPP) Agreements, who is setting costs for Tube Lines after London Underground issued restated contract terms last December and Tube Lines responded with updated pricing, today published his draft directions and guidance on Tube Lines’ costs for the seven and a half years from 1 July 2010.

His proposed figure of £4.4bn sits between Tube Lines’ revised bid of £5.75bn and London Underground’s (LU) figure of £4.0 bn.

The figure is “very demanding”, Tube Lines has said. “A settlement at this level is not conducive to private sector involvement in the Underground, nor does it reflect the reality of the Underground working environment,” said Tube Lines chief executive Dean Finch.

“A settlement at this level is not conducive to private sector involvement in the Underground.”

Tube Lines chief executive Dean Finch

“The Arbiter recognises that LU is a difficult client, but rather than including a costed assessment of that impact, he expects Tube Lines to cover its costs by making claims against LU now and more in the future.”

A Tube Lines spokesperson said that despite Finch’s comments the company remains committed to the contract. “The shareholders are still committed to Tube Lines and the work. We have confidence in the process that the Arbiter is doing,” she said. “We are confident that we’ll still be here in a year doing this work.”

In a statement, Tube Lines argued that it is, by the Arbiter’s own assessments, more efficient than London Underground. The spokesperson said: “We are currently doing the work at a third less than LU are doing on their line.”

Careful decision

Bolt defended his decision, saying he had found that a hypothetical company acting efficiently and within Good Industry Practice – the test in the PPP Agreement – could deliver its obligations for a lower cost than that proposed by Tube Lines, although not as cheaply as LU has suggested.

A key reason for the difference between the costs proposed by the Arbiter and by Tube Lines involves line upgrades. The Arbiter said Tube Lines could have delivered the Jubilee Line upgrade on time and to budget, and could now be progressing with the Northern Line upgrade.

“This document is a draft and we have a further six weeks to make representations which we will do robustly.”

Tube Lines statement

The Arbiter recognised that Tube Lines has made significant contractual claims against London Underground, including in respect of the Jubilee Line upgrade, and said that if these claims are successful, Tube Lines would be expected to make further claims relating to the upgrade projects which would add to its future income.

Tube Lines said it would appeal against the Arbiter’s conclusions. “This document is a draft and we have a further six weeks to make representations which we will do robustly,” said a statement.

Bad news

The bad news for Tube Lines came after the announcement yesterday that Finch will leave the company to become chief executive of National Express. Finch will remain as Tube Lines chief executive until a successor is found and a transition period is completed.

“He remains committed and focused to leading Tube Lines through the Periodic Review process,” said a statement.

LU and Tube Lines may both make representations on the draft directions, and the Arbiter will finalise his directions on costs in early March. These final cost figures will then form the basis of draft directions on future charges and on financing.

The PPP Agreements contain provisions for a Periodic Review to take place every seven and a half years.

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